Big Brains Rule Trading Floor
Sun Apr 14, 5:22 PM ET
By Elizabeth Lazarowitz
NEW YORK (Reuters) - Daniel Mathisson and his team crunch complex algorithms at their computers all day long, but they are no geeky mathematicians -- they are part of the new breed of Wall Street trader.
With the seismic shifts in the world of share dealing, the trader of the future is looking less like the captain of the football team and more like a member of the chess club.
"The type of people who work on trading floors are much more often going to be the skinny guys from MIT, and much less often the stereotypical trader," said Mathisson, who is head of electronic trading strategies at Credit Suisse First Boston.
Since the flashing screens and blinking lights of computers made their debut on trading floors, pundits and the press have been predicting traders would become extinct, replaced by machines that coldly and anonymously match buyers and sellers.
While that scenario has not come to pass just yet, the era of the stereotypical Wall Street trader -- both celebrated and vilified in movies and popular culture as sharp-elbowed symbols of the American dream -- may be drawing to a close.
Mathisson's team -- like a growing number of tech-savvy traders -- create programs to make the computer a tool for making small-scale pricing decisions, the task traditionally performed by traders.
In the new, profit-squeezed world of equity markets, firms are battling fiercely for market share and turning to more complex trading methods to squeeze more pennies out of each transaction. In an environment where a fractional advantage can make a difference, a mind for physics, math and computers is increasingly trumping street-smarts and gut instincts as the key traits of a stock trader.
"The trader of the future probably has a PhD in either mathematics or physics, is able to program in a number of different (computer) languages," said Michael Flood, a managing partner at executive search firm Westwood Partners. "I'm not saying the guy who has kind of a feel for the market is extinct, but the face of trading is certainly trending toward more quantitative."
LAYOFFS RAVAGE TRADING FLOORS
While technology is changing the face of the brokerage industry, so are hard times. The stock market's two-year descent from record highs to multiyear lows last fall has ravaged Wall Street, crimping trading volumes and prompting layoffs.
The securities industry cut 32,700 jobs last year, after hitting a record high of 776,400 employees in February 2001, according to the Securities Industry Association. Wall Street's heavy-hitters like Merrill Lynch and Credit Suisse First Boston have slashed thousands of jobs in dramatic restructurings.
While it's hard to say exactly how many of the job losses have come from trading operations, it's clear that the industry is in the midst of its worst pullback decades, said John Giesea, president of the Securities Traders Association.
"I've not seen it anywhere as severe," said Giesea, a 30-year Wall Street veteran. "This is probably the most serious challenge to the trading community."
U.S. economic malaise and a severe stock market slump are a big part of the problem, but the onslaught of electronic trading systems has also helped de-humanize the business.
The anecdotal evidence is abundant.
Last year, the New York Stock Exchange (news - web sites), the world's biggest stock exchange, got rid of 150 trading clerks -- known as floor reporters -- whose jobs were replaced with automated systems.
About one-third of all Nasdaq market trading is now done through electronic trading, and some trading floors, once a cacophony of ringing phones and shouts, have quieted to the soft click of mouse buttons and fingers tapping on keyboards.
VIDEO GAME WIZARDS
That shift has also produced a much more rapid pace from the days when traders all trading was done by phone.
"It's night and day," said Lance Zipper, managing director of equity trading at Brean Murray & Co, who has worked as a stock trader for 45 years. Since he started in the business, he said, the amount of time needed to do a trade has shrunk from five to ten minutes to just seconds.
Trading at that lightning speed requires that traders have video-game reflexes, but also the kind of mathematical precision that computer-generated trading allows.
"You're playing with an electronic game when you're playing with your Nasdaq machine," said James Volk, co-director of institutional trading at D.A. Davidson & Co. "The guy who's the fastest, and the one who has the best strategy, is the one who gets the best executions."
But being a world-ranked master at Resident Evil or Doom isn't a guarantee of Wall Street employment, either, unless you also have the computer engineering skills to create those video game programs.
PENNY FOR YOUR THOUGHTS
The bar for high-level trading skills, which has been rising for years, went up still further with the switch last year to listing stocks in pennies rather than fractions. That move has made it harder for many share dealers to make money -- especially for traditional Nasdaq dealers, known as market makers.
Market makers, who essentially act as brokers, often pad profits by pocketing the spread between the price at which they buy stocks and the price at which they sell it. With decimalization, stocks can move by as little as one penny at a time, instead of the 1/16 of a dollar, or six cents, that used to be the smallest possible incremental change. That reduced discrepancies between bid and ask prices, known as spreads, putting still more pressure on profits at share dealers.
"All of a sudden you couldn't make money the old way. You have to change now," said Brian Pears, head of equity trading at Victory Capital Management and a 10-year veteran of stock trading. "This is the last generation that is going to trade anything like what we've seen in the past 25 years."
While lofty degrees are not a prerequisite for traders just yet, a knowledge of complex trading methods has become increasingly important, said Douglas Hanslip, principal at executive recruiter Korn/Ferry International.
As investment banks and share dealers try to differentiate themselves in a highly competitive environment, they are beefing up their propriety operations, automating market-making in cash trading and boosting trading in equity derivatives.
Market-makers now must have a more in-depth knowledge of the sector they trade, be adept with technology and need to be able to quickly digest the flood of available information.
"In traditional trading, people have always been very good with numbers ... but the rigorous academic, quantitative background wasn't necessary," Mathisson said. "That is gradually becoming -- I wouldn't say necessary -- but more valuable." |
