The Future of Trading Desks

[AlexLielacher1]

In this post I will discuss with you the current and future state of all main global markets roles.

Trading
The headcount for trading roles has declined steeply since the financial crisis. Firstly, pretty much all prop-trading desks closed down, so that banks are compliant with the Volcker Rule. Secondly, market-making desks have reduced headcount due to the decrease in balance sheet dedicated to trading. And thirdly, the increase in electronic trading has also contributed to a decrease in trading roles across the asset classes.

With the current state of illiquid markets (in fixed income most notably) and banks’ increased risk sensitivity there is less of a need for traders. Albeit, this varies from asset class to asset class, generally speaking trading roles are declining at banks.

Sales
With increased illiquidity in the financial markets and with many banks refocusing on their core strengths, as opposed to trying to be wholesale investment banks, sales roles have also declined since the financial crisis. However, as both primary and secondary markets require communication with clients there will always be the need for sales people. I believe this is the case across all asset classes. Of course, the increase of electronic trading and the emergence of more electronic trading platforms means there is less of a need for large sales teams. But, nonetheless, I firmly believe that a career in sales has more longevity than one in trading at this point in time.

Research
Economists and asset class specific research roles have, in my view, taken less of a hit since the crisis. Equity & credit research teams have been cut at various banks, but many have made the move to the buy-side, which is a natural progression for many research analysts.

Furthermore, since illiquid markets are forcing investors to opt for more of a buy and hold strategy, strong fundamental analysis has become more relevant. Hence, I believe that research roles have a bright future, albeit more on the buy-side than sell-side.

Structuring
Structuring financial products that help corporations and investors with their risk management is currently very relevant. Especially when it includes regulatory aspects. While many exotic derivative trading/structuring roles have disappeared following the financial crisis, there is still a strong demand for less complex financial structures for hedging purposes.

E-Trading
Electronic trading is still a growth area for banks and has been for the last 10 years. This won’t stop any time soon. Asset classes such as spot FX, cash equities and commodities are already e-trading favourites and fixed income will be the next frontier.

Syndicate/New Issues/Primary Market Roles
The primary market in fixed income has benefited from low interest rates in the last half decade, which has seen new issue desks generating serious P&L for banks. As the financial markets have become more illiquid in the secondary market and investors are choosing to buy large clips in the primary market instead I believe that primary market-related roles (Syndicate, DCM) will have a bright future in the fixed income space, while tech IPOs should keep ECM desks busy for a while.

Risk & Compliance
Risk management and compliance departments have seen massive growth since the financial crisis and regulations have tightened globally. While before the financial crisis risk management and compliance was somewhat of an after-thought of many investment banks, it is now very much at the forefront of many decisions banks make. No one wants to be charged high penalty fees for breaking financial regulations. Hence, risk management and compliance careers have a bright future. While they still don’t pay as much as revenue-generating roles, salaries have gone up in recent years.

Support Roles (Middle Office)
Sales and trading support roles are often considered as a stepping-stone, that one does for 2-3 years, before taking the plunge into front office. If you know how your bank’s systems work inside and out, and perform well, you will likely make the jump into the front office sooner than later. Having said that, many support roles are on a temp basis and can therefore easily be replaced. So, if you end up in a support role with the aim to jump into a front office role, make sure you make yourself irreplaceable very quickly.

 

[Baby Boomer1]

Thanks for this post.

Can you elaborate on the last part? I have heard it's very-very rare to make it to FO from MO, part of it being familiar with the risk system so you can fvck the bank over like that trader at UBS did lol? Also how does one make her or himself 'irreplaceable'? Not sure what that means.

 

[AlexLielacher1]

Hey Baby Boomer, I see your point about knowing the systems too well. However, that mainly refers to risk systems. So, if you work in risk management then moving into trading will be rather tough at this day and age, as you rightly suggested. If you work as a trading assistant or a sales assistant/support, then you wouldn't have access to the type of system where you can hide losses or increase risk limits.

In terms of making yourself 'irreplaceable' I am referring to being an outperformer and knowing the systems well enough, so that if a trader or a sales person huffs & puffs about the "sh*tty" systems that you know how to fix the issue asap and therefore be a great help to the front office.

 

[Baby Boomer1]

Hey Baby Boomer, I see your point about knowing the systems too well. However, that mainly refers to risk systems. So, if you work in risk management then moving into trading will be rather tough at this day and age, as you rightly suggested. If you work as a trading assistant or a sales assistant/support, then you wouldn't have access to the type of system where you can hide losses or increase risk limits.

In terms of making yourself 'irreplaceable' I am referring to being an outperformer and knowing the systems well enough, so that if a trader or a sales person huffs & puffs about the "sh*tty" systems that you know how to fix the issue asap and therefore be a great help to the front office.

Got you, thanks.

 

[BNC1]

Thanks for the write up.

What does someone in E-trading do? Is it basically like a tech role which doesn't involve real trading?

Which asset class do you see the most promising looking forward?

 

[AlexLielacher1]

E-trading differs slightly from asset class to asset class, but in general you have clients on your platform or on multi-dealer platforms, which your platform is linked into (this is the case for many fx platforms), and you communicate with clients, monitor the trade execution flow and make sure everything goes smoothly with the system.

I knew the e-fx guys at my last banking job very well so got quite some insight into their business. The way an e-fx platform works is that computers monitor the trading behaviour of clients and adjust the pricing accordingly. For example if a client is a corporate ,that always comes in the hedge the same currency, the price will adjust so that there is a touch more margin in it for the bank (all within reason though as fx is an ultra competitive market) each time they come in. And bid/offer spreads will tighten and widen for the different clients that come in etc. It's very interesting technology. The e-fx traders will also have ot manage the risk if the market moves to much in one way or the other. Sometimes that is managed seperately by the spot fx traders, sometimes by the e-trading guys themselves.

In terms of which asset class looks most promising going forward. Puuhhh that's a good question. I think credit (corporate bonds) still has a future because banks aren't lending so coporates and SMEs need to issue bonds to finance themselves, but the bond market is soooo overbroked that I would be a bit wary now moving into it. Best there would be the primary side (DCM or Syndicate).

FX and cash equities is all electronic so you need to be more IT wise to move into those nowadays. Derivatives is a different story. FX as such will never go away as an asset class for obvious reasons. FX options or something in the more exotic derivative space in FX surely has a future.

Commodities I am the wrong guy to ask. I don't really have any friends in commodities and have never worked nor interned on a comm desk. The asset class has suffered a lot (just look at Jim Rogers' commodity index) and some banks have closed their desks recently (Barcalys if my memory isn't playing tricks on me). Having said that, it is hard for me to judge where that asset class will go, in terms of banking/trading jobs, as I simply don't know enough about that sector.

 

[thebondking1]

Thanks a lot for your reply. I fuckin love capitalism. Being an FX options trader and having a relatively stable career is something I heard several times. E-trading seems like a glamorous IT job to me, not sure if I want to go in to that haha.

Is trading a cash product boring? I mean like just executing client orders, I am guessing you don't really get to express your views on the market, or do you?

 

[AlexLielacher1]

Flow trading a cash product is very much about expressing your directional views.

Execution trading is what you find on the buy-side (i.e. at fund managers or private banks). There you are simple executing at the best price, without expressing your view on the market, as that is (normally) not part of your mandate as an execution trader.

 

[thebondking1]

Flow trading a cash product is very much about expressing your directional views.

Execution trading is what you find on the buy-side (i.e. at fund managers or private banks). There you are simple executing at the best price, without expressing your view on the market, as that is (normally) not part of your mandate as an execution trader.

Thanks.

So what is so hard about being an execution trader, eg where does talent come in to the picture? I am just wondering.

 

[AlexLielacher1]

Thanks.

So what is so hard about being an execution trader, eg where does talent come in to the picture? I am just wondering.

Lol, yeah, that's a fair question and my response is that execution traders are often referred to as 'execution monkeys'. Does that answer your question?

The 'skill' of execution traders is finding liquidity, so that they can execute their size at the best price. But yeah, sell side trading is a whole different ball game as you need to juggle client inquiries/flow and market positioning.

 

[thebondking1]

Lol, yeah, that's a fair question and my response is that execution traders are often referred to as 'execution monkeys'. Does that answer your question?

The 'skill' of execution traders is finding liquidity, so that they can execute their size at the best price. But yeah, sell side trading is a whole different ball game as you need to juggle client inquiries/flow and market positioning.

Fair enough haha, thanks for your time. So how does one go about finding liquidity? Is it just calling up people?

 

[Daniel Plainview1]

Commodities undergone huge structural changes over the past few years. The market for structured OTC products in particular taken a major hit, meaning the numbers of traders and salespeople have been consistently declining.
The long-term bearish market sentiment is one reason, but it's also the fact that the sector has significantly shifted towards cleared, vanilla business, especially on the derivatives side. This has meant that it has only really been the big commodity trading companies, ie those who have a presence in the physical commodities space (and who can therefore coordinate their paper and physical businesses more efficiently) who have been able to stay afloat, and even then, major players such as Glencore still find it tough.
As Alex stated, many banks have recently shut their commodities desks. I'd say 2016 is not the year for this asset class, but seeing as there will always be a market for commodities, the sector will definitely recover at some stage.

 

[v30301]

I think it'd be good to add a section on the future of private proprietary/HFT trading firms here.

 

[redherring1]

It's so interesting to read this post from years back and compare with how the trading related jobs are evolving today!

I have to agree with some of the great points made by the OP. I observe 2 negative and 4 positive trends for traders mainly.

1(-) Prop trading has continued to significantly evolve after the OP's post. Prop trading simply doesn't make a lot of sense in the new regulatory environment. It's hard to justify a business model that risks the bank's own capital. With mass adoption of technology, increased transparency and stricter regulations information asymmetry needed to sustainably profit while risking a major bank's future viability isn't there. Banks also have a lot more diversified business models, which is good for the economy and everyone.

2(-) Traders have been replaced with algorithms starting from the mid-2010s. I remember working at a bulge bracket bank's market-making desk making insane daily trading volumes manually and one day they sent a geek to write a little script that optimized the market-making better than all seasoned traders at the bank. And algos don't call in sick nor require big bonus checks hence they are in favor.

3(+) In the recent couple of years interest rate hikes coupled with global inflationary pressure on economies made the fixed income desks a lot more exciting compared to the quantitative easing era.

4(+) Structured product departments are still on demand due to trends towards personalized/specialized solutions.

5(+) Research roles remained strong. This is mainly due to emerging technologies and new business models such as med-tech, blockchain, renewables, sharing economy, platform models, on-demand models, AI as a service etc. All these new models/companies based on new tech necessitate smart and dynamic research analysts to demystify them for institutions/investors.

6(+) Additionally, I think there will be a major demand for ESG-related trading solutions and asset management services. Almost all of the research from MBB and others suggest that. Recently I saw I think on Bloomberg that ESG assets are expected to hit $53 trillion by 2025. And alternative assets as a broader category are expected to grow significantly as well. (Currently they sit at 12% of $150 trillion global AUM.)

 

[JustAnotherHuman1]

It's so interesting to read this post from years back and compare with how the trading related jobs are evolving today!

I have to agree with some of the great points made by the OP. I observe 2 negative and 4 positive trends for traders mainly.

1(-) Prop trading has continued to significantly evolve after the OP's post. Prop trading simply doesn't make a lot of sense in the new regulatory environment. It's hard to justify a business model that risks the bank's own capital. With mass adoption of technology, increased transparency and stricter regulations information asymmetry needed to sustainably profit while risking a major bank's future viability isn't there. Banks also have a lot more diversified business models, which is good for the economy and everyone.

2(-) Traders have been replaced with algorithms starting from the mid-2010s. I remember working at a bulge bracket bank's market-making desk making insane daily trading volumes manually and one day they sent a geek to write a little script that optimized the market-making better than all seasoned traders at the bank. And algos don't call in sick nor require big bonus checks hence they are in favor.

3(+) In the recent couple of years interest rate hikes coupled with global inflationary pressure on economies made the fixed income desks a lot more exciting compared to the quantitative easing era.

4(+) Structured product departments are still on demand due to trends towards personalized/specialized solutions.

5(+) Research roles remained strong. This is mainly due to emerging technologies and new business models such as med-tech, blockchain, renewables, sharing economy, platform models, on-demand models, AI as a service etc. All these new models/companies based on new tech necessitate smart and dynamic research analysts to demystify them for institutions/investors.

6(+) Additionally, I think there will be a major demand for ESG-related trading solutions and asset management services. Almost all of the research from MBB and others suggest that. Recently I saw I think on Bloomberg that ESG assets are expected to hit $53 trillion by 2025. And alternative assets as a broader category are expected to grow significantly as well. (Currently they sit at 12% of $150 trillion global AUM.)

Cheers for sharing your insights. Is prop trading obsolete by now? What are some major players, I believe they are still out there but I guess post Dodd-Frank act in the US it is non-existent at banks. Why does this regulation apply to EMEA region as well, not only the Americas?

Re 2, which asset classes are automated, is it only cash products? Is it really as prevalent as you make it out to be? There are still traders left at banks, aren't they?

Does the above mean that the Technology department of a bank has become more important than it used be? This is in the "middle-office", correct? And quants can be classified as "front-office"?

Can you shed some light on why ESG is the 'next big thing'? Obviously because of global warming and importance of greener stuff today, but if you could expand would be much appreciated. Also, which stock should I buy in ESG space if it really will grow massively over the next years?

 

[redherring1]

Hi, cheers. Really good questions/points. I appreciate your input as well.

I've never worked in compliance directly but afaik Dodd-Franks act triggered many other financial frameworks globally, FCA Handbook in 2013 for the UK and Mifid II in 2014 for Europe banned commercial banks from prop trading. That then gets distributed to the whole global finance network in waves as various financial institutions faced trading regulations as well. Also even if you're a MENA bank (or a US bank with presence in MENA), or HQ'd in MENA and have representation in the US, UK, EU that might impact you as well. So the whole global network kind of works in harmony with each other.

With the whole IT automation and front office roles becoming occupied more and more by quant types has to do with the new generation bankers as well. But honestly you made a great point and made me realize that I might be biased as well. See I've always utilized computers and IT quite heavily and looking back it might have influenced the trading environments I've been in and people I've met. But regardless I personally witnessed many banker colleagues and hot shot traders replaced by quants and custom IT systems and straight out algorithms throughout the years since the early 2010s.. There will always be front office traders who don't need any IT because of the human element and importance of network and relations but in the big picture there has been a massive shift towards IT and automation compared to 80s and 90s and early 2000s.

I think it might be a bit bold to say ESG is the next big thing in finance but it has great potential to be one of the next big things for sure. Actually I was planning to write a little piece on that and share some insights here, let me nudge you when I publish it, you might find it interesting.

Cheers