How has the trading landscape evolved over the past 30 years?
Automation and electronification has brought a number of changes, one of which has been the large increase in volumes. There are various reasons for that – the obvious one being that you can do more with less when you apply computers to a problem like this. Trading desks have got smaller over the years, while volumes have gone up.
Another manifestation is that trading has become more widespread geographically. At one point, if you wanted to trade a German stock, you had to be in Germany and if you wanted to trade a Thai stock, you had to be in Thailand. Today, you can pretty much trade anything, anywhere. The electronification of the market has brought about that change as well, which has allowed money to flow around more broadly.
The third evolution has been around different trading models. If you go way back, 30 years plus, trading – even on exchanges – was broadly manual. You basically phoned an order through onto the floor of the exchange and people negotiated prices and so on. Since then, central limit order books have come in, around 30 or so years ago. Electronic access to those came with it and we’ve seen evolution of market models ever since, because it’s relatively easy to program in software changes to these types of systems to give you periodic auctions and all these different ways of trading that simply wouldn’t have been possible by hand.
What are some of the good things that we’ve lost and/or gained in the past three decades?
Starting with the gain, the obvious one is cost. This evolution has certainly helped facilitate dropping commission rates pretty much across the board, particularly in the more agency-style business because again, you could do more with less and new entrants coming in and competitive pressures and the rest of it. Ultimately, trading has become a lot cheaper.
There’s certainly been concerns raised over the years with certain types of trading. I think it’s safe to say that some of the high frequency markets had a bit of a bad reputation, perhaps in the press, for good reasons or bad. It’s certainly caused a lot of changes and people have had to adapt to that. The days when you could simply just put a large order directly on the market and the market would just deal with it, things have changed. You need to be a bit more careful and a bit more considerate about how you interact with the markets.
Of course, the flip side of that is that doing so is much easier because the technology around, and indeed the experience around to interact with the markets, in this new world, is there and is available for a large number of participants at good prices. So I think those things have changed and it’s also safe to say that the electronification of markets and indeed trading in general works best for liquid instruments.
Liquid listed derivatives, liquid shares and so on, they have really ridden the wave of this very effectively. When you get into other asset classes, it’s less obvious that electronification makes a material difference because there’s so much manual processing anyway. There are still advantages, not least of which being that you take away rekeying risk and things like the error rates of trading can come down, and indeed have come down. That’s a big boon as well. But whether you see the same sort of change in volumes and trading styles in some of these instruments or not, that’s yet to be seen. We haven’t seen an awful lot of change in a number of asset classes over the last few years.
Alternatively, what are some of the bad things we’ve lost and/or gained over the same period?
I don’t know if there’s anything particularly that we’ve lost, however one thing which comes up in conversations every now and again is this slight worry about whether we are losing any skills in the industry. This is a general theme which crops up not just with the electrification of trading, but also with the younger generations coming to the markets in a much more technologically driven environment. Also, with artificial intelligence coming in and being able to take on some of the heavy lifting.
In a way we’re exposing ourselves to a potential risk that we have less experience and knowledge, particularly for dealing with tricky situations on the trading desks. That’s something which I think we as an industry need to make sure we’re very mindful of and act against. Not incidentally by not adopting these technologies or indeed hiring younger people, but by making sure that we have training and we keep the handing down of knowledge going.
Looking forward, how do you expect the trading landscape to shift in the next 30 years?
We will see in some ways more of the same. There will continue to be evolution and innovation in the markets and people will try new things. AI of course is something everyone needs to keep an eye on as to what various types of AI will allow you to do or enable you to do in the world of trading. Even if it’s just supporting the process in terms of workflow management and pre-trade idea generation, or even if it doesn’t actually make it the trade process itself. We will see more of that coming through as well. It’s also safe to say that newer technology such as blockchain, distributed ledger technology and so on has yet to make a real impact in financial services. We’re probably going to see that becoming more mainstream in the near future, because of the possibilities that provides to simplify a lot of processes.
Beyond that, very hard to tell. I think it’d be very hard to tell 30 years ago where we would have ended up now. People probably predicted fewer traders – with some people even predicting no traders – and that turned out to be completely wrong and a good thing too. I wouldn’t want to say in 30 years’ time we’ll have no traders. We’ll probably see a continuation of what we’ve got today, wherein skill set and the role of traders changes over time – with this probably becoming more technology-based. But we’ll still have traders. We’ll still have trading. There are the larger scale changes that technology will help bring, not least of which being perhaps bringing more cross asset trading together, as the barriers between these asset classes breaks down and technology helps that. Also, with people becoming more adept at managing different types of asset classes as part of their day job. I can see that trend continuing.