A trade body set up by high-frequency-trading firms has released a video meant to highlight the benefits that these kinds of firms bring to financial markets.
The video, from Modern Markets Initiative, also inadvertently spelled out some of the negative side effects, too.
Toward the end of the video, Mark Gorton, the founder of Tower Research Capital, made the following statement (emphasis ours):
The most positive development on Wall Street in the last twenty years is the advent of electronic trading. You used to have a lot of very highly paid people on Wall Street. A lot of those jobs have been automated away. For average investors around the country, they should be very happy that they are saving money thanks to the new automated markets.
I am pretty sure the Wall Streeters who have had their jobs automated away do not consider electronic trading the most positive development on Wall Street. In fact, I am pretty sure they are pretty upset about it. I have had emails from out-of-work traders saying as much.
Now, this isn’t a negative side effect of HFTs so much as the technology that has allowed them to prosper.
Markets have gone more electronic. There are more computers and fewer traders. There are strong arguments that this change has benefitted investors. For the banking industry, however, it poses a significant challenge.
Boston Consulting Group touched on this earlier this week in a big report on the capital-markets and investment-banking industry. Its argument was that investment banks now need to think like information companies, as opposed to capital providers.
The report said:
Electronic markets also reduce the need for human labor, undermining the requirements for individual desktop software, terminals, and other graphical-user-interface products. This development increases the relevance of other layers in the technology stack, such as security, data centers, communication protocols, and physical networks.
That shift has a big impact on staffing. According to Credit Suisse, Goldman Sachs had 600traders in New York City making markets in US stocks in 2000. Today that number is below 10.High-speed-trading firms have taken over the floor of the New York Stock Exchange. Goldman Sachs and JPMorgan have called themselves tech companies.
Elsewhere in the MMI video, Jason Carroll, a managing director at Hudson River Trading, pointed out that the market was ripe for this kind of a technological advancement (emphasis ours):
We had a situation where people were literally yelling prices across the floor and making decisions in their heads about what they wanted to buy, how much they wanted to buy, what price they wanted to buy. The consequence was that the cost was relatively high. US equity markets were ready for a technological revolution.
As my colleague Bob Bryan noted in an article over the weekend, revolutions don’t tend to work out for everyone involved.
Like it or loathe it, this is where Wall Street is headed. Fewer people. More technology. Different skill sets required.