SIA Technology Management Conference
Sell Side Pours Dollars Into Capacity, Connectivity | Market Data Needed--And Faster, Please | Hedge Fund Asset-Class Demands Raise Stakes for Servicers | SIA, BMA Quiet About Merger; Some Open Questions Remain | Matching People and Technology | Elsewhere in Town: Thain, Nazareth at the Big Board's Regulatory Show | Business Is Looking Up, Vendors Act Accordingly | Sybase: Can Breadth Trump Specialization? | Platform's Latest Version Goes Real-Time | Intel: Wanting to Be Noticed--Up to a Point | Smart Searches Find Their Way to Wall Street | Asset Manager Ixis Using Pyxis' mWholesaler | Vendors Combine Real-Time and Historical Analytics | Bracing for MiFID
Matching People and Technology
How automation and market pressures have changed the personality and culture of the prop desk
June 19, 2006
Over roughly the same period that trading technology has undergone a revolution, a new generation of proprietary trader has emerged that bears little resemblance to its predecessors. As Shawn Banerji, an executive director in New York for recruitment firm Russell Reynolds Associates, puts it, "The DNA of the trader started to change" between five and ten years ago. "It went from being a frat party to a room full of computers."
Larry Leibowitz, COO for Americas
equities at UBS in Stamford, Conn., says the technical skill level
has been progressing steadily "every year for the last 20. They
were [historically] focused on the mechanical aspects, writing the
order ticket and being on the phone with the New York Stock
Exchange. That was 20 years ago." Today's traders monitor
electronic systems that move the big blocks of highly liquid issues
like General Electric or Microsoft. They really earn their
paychecks when they have to step in and work a trade for a lightly
traded small cap.
According to Leibowitz, the biggest factors leading to the current generation of technology were the Nasdaq order handling rules of 1997, the switch to decimal from fractional pricing of stocks in 2001 and the unbundling of commissions from research that is currently under way. "Decimalization made electronic trading easier," says Leibowitz, who was EVP at institutional brokerage Schwab SoundView Capital Markets before it was acquired by UBS in 2004 and CEO of the Redibook electronic communications network when it was owned by Spear Leeds & Kellogg. "It meant you didn't need as many people doing mechanical things. People had to be not only technologically literate, they had to add other value."
"Once you had this huge influx of market data, you had to have people who understood the math," says Bernard Donefer, adjunct assistant professor in the department of statistics and computer information systems at Baruch College's Zicklin School of Business in New York. From 1996 through 2002, he was SVP and head of capital markets systems at Fidelity Investments in Boston.
"There's a huge number of ex-physicists in this business," notes Donefer, "and anybody who's been in the business has seen it go on for the past four or five years. The whole strategy has become different."
"I don't think the change has been subtle at all," says Jeffrey Hudson, CEO of Vhayu Technologies of Los Gatos, Calif., a supplier of high-performance transaction processing and database systems. "There's this new kind of trader who can understand strategies and new ideas and then translate them into algorithms. The new traders are guys who are very technology-fluent. There's still room for high-value-added activity. But with a lot of the high-frequency trading, where you trade thousands of times a second, a person just can't keep up with that. An algorithm is simply a mathematical expression of what a human being used to do."
In addition to the regulatory changes and the inevitable progression of technology, one of the worst market failures of the past ten years may also have inadvertently been a catalyst to the new breed of trader. Andrew Lo, a professor of finance and the director of the laboratory for financial engineering at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Mass., believes that the 1998 collapse of hedge fund Long Term Capital Management actually helped legitimize its strategies. One of them, relative-value trading, also known as statistical arbitrage or pairs trading, "changed the face of Wall Street," Lo says.
