Advanced Trading: What's been the biggest change in the role of the buy side trader?
George Michaels:The trading desk on the buy side has become window dressing these days. They're still there, still look the same, the traders still stare intently at the screen but it's more about marketing and self esteem for the buy side manager.
Advanced Trading: When did this start to happen?
Michaels:I saw this when I was working at Carlson Capital. There was definitely a point when I went to the chief investment officer and asked why do you have a trading desk? All your VWAP orders are being worked by the sell side firms and the algorithmic trading - moving a large block the algos will slice and dice the large trades. The old ways of doing the trades before algos was to get the trades done without moving the markets. Well, about 2002 and 2003 Credit Suisse First Boston introduced the first algorithm and they put the trading desks out of business. Three or four years later I asked why they still had a trading desk and were paying guys half a million a year to sit around and pick their noses.
He said it wouldn't be a hedge fund without a trading desk.
Advanced Trading: So a trading desk is really for his edification?
Michaels:It's for his edification and for the institutional investor so when they come in it's not just smoke and mirrors. "Look, we have people here busily working away and trading. This is why you're paying us 2 and 20. I need the 2 percent to pay all these guys."
It's window dressing for the large institutional customers as well. The institutional investor sends due diligence teams, while a retail investor heads for the door in a down market. When a large pension fund or endowment comes to a hedge fund they want to see trading desks.
Advanced Trading: Are things different at newer hedge funds?
Michaels:With the younger hedge funds, to launch one these days all you need is a dollar and a dream. I know one person who is running a hedge fund on $150,000, that's it. How? Because his costs are next to nothing because you don't need a trading desk. You need a retail-side trading station, Tradespeed is one, so there are these things that are called a Hedge Fund in a Box and the paperwork is getting super easy to do.
So nowadays the more mature hedge funds have the trading desks.
Advanced Trading: How has the life of a trader evolved?
Michaels:A decade ago it was about working bank orders for minimal market impact. Then it became window dressing. When the old guard retires, there will be specialized groups that will need a trading desk for complex orders and there will be firms that don't need the overhead of five guys with Bloomberg terminals on a fancy trading desk with a nice view of downtown Dallas. That's a thing of the past.
It's happening now, now as hedge funds launch, they are launching in people's apartments in virtual offices and investors are expecting less and less to see trading desks.
Advanced Trading: Is the trader's role more centered on relationship management?
Michaels:The traditional trader model is dead. You have the PM/Trader with a degree in physics and economics and he does everything himself. He might take on more marketing capacity because everything is so automated. The analyst is doing that job, says he wants to execute $10 million and he pushes a button a box.
The traditional role of the trader is gone, it's now a function of the PM and analyst.