When stories came out this summer about the 500-plus New York Stock Exchange (NYSE) traders who were let go when the exchange moved to partial electronic trading, it looked like technology was eliminating jobs on Wall Street. But upon closer inspection, this turns out not to be true -- at least, not entirely. According to data collected by SIFMA, overall employment on Wall Street is up. Citigroup, Goldman Sachs, Deutsche Bank, Bank of America Securities and Royal Bank of Scotland all have been expanding their trading floors and are said to be hiring traders. "Technology isn't a threat to jobs on Wall Street," explains Peter Noll, chief technology officer at Pioneer Investments. "Technology is doing two things: It's changing the role of humans, and it's allowing companies to absorb growth without adding people." To the first point, Noll notes that in the past, firms have hired college graduates, some with advanced degrees, into somewhat clerical roles. "Technology is letting us automate the clerical work and let these people use the analytical skills they've learned," Noll says. For instance, in the investment middle office, computers and software can now handle reconciliation, leaving only exceptions to the staff, he notes. Easily automated jobs -- such as the order-taking floor trader -- are being axed on Wall Street, just as they are in manufacturing, publishing and other industries. "It's been a constant trend since we went from video green screens to digital quote data and began using applications to parse the data and start doing rudimentary electronic trading," points out Alan Paris, director in PricewaterhouseCoopers' (PwC) financial services advisory division. "It's been accelerated by the move to instantaneous clearing for commoditized products." But on the bright side, new technologies, exotic instruments and growing market volumes are creating new jobs and making existing jobs more interesting, experts point out. Traders vs. Program Trading The NYSE layoffs, most say, only affect a relatively small group of order-taking middlemen. "The people who got displaced by algorithmic trading were not the upstairs traders, not the buy-side traders and not the sell-side traders, but the floor brokers and OTC market makers," says Dan Mathisson, managing director and head of advanced execution services at Credit Suisse. "The act of taking an order and passing it on to the next guy without an error used to be highly prized. Now that's all done by FIX, by computers and by algorithms." Many floor brokers have transitioned to "upstairs" roles, Mathisson continues. "But this requires changes in skill sets, and you're going to have some people who adapt and some who don't." For example, traders on both sides have to be versed in many products. "You can't be a one-trick pony anymore," says PwC's Paris. "Traders and firms are going cross-asset and cross-product. Clients want exposure and leverage, which means you have to create products for them that might have an equities component, a foreign exchange component and a fixed-income component." But how do traders obtain these new skills? "They double up with people who know that stuff," says Mayiz Habbal, managing director of Celent's securities and investments group. "Some study after hours. ... If you have the potential, you'll catch up on these skills quickly; if you don't, you'll drop out." A slew of new roles exist on trading floors today for people with econometrics, statistics and software development backgrounds, Credit Suisse's Mathisson says. In his department at Credit Suisse, "Everybody's working on algorithms; whether you call us traders or not is semantics," he says. "We're not traders in the sense that we're not working on individual transactions. We're trained in sciences and approach trading as a science rather than an art, looking for repeatable patterns in the way stocks behave and using those to trade better. Most people would call us quantitative analysts, computer programmers or developers, rather than traders." Still, traders themselves are anxious about the effect of technology on their jobs. When Pragma Financial Systems executives bring their electronic trading software into Wall Street firms, traders sometimes say they fear the program will replace them, according to Lee Maclin, director of research at Pragma. Yet Maclin insists, "On the whole, traders love this stuff. There are holdouts -- there are people who don't want to embrace the new technology. But most traders are clamoring for better tools." Maclin also asserts that program trading is relatively easy for traders to learn and that new tools often mean new jobs, pointing to the Black-Scholes model as an example. "In the early '80s, traders who were trading options by gut feel started to compete with the first traders who were using the Black-Scholes options pricing formula," he recalls. "It was an innovation that caused the old-style traders a lot of distress initially, but it spawned a whole new industry. At that time, there must have been several hundred derivatives traders, mostly on the floor, in the entire world. Now there are tens of thousands of derivatives traders. This is a prime example of a few growing pains that lead to huge growth." So where might the resistant traders go? Some will move to the back office, where trade allocation, confirmation and settlement is done, because they understand the business well, hypothesizes Raghuvir Mukherji, senior consultant, financial securities, domain competency group, at Infosys Technologies. Others will become business analysts and get hired by companies such as Infosys. "They are the best people to give the functional inputs for programming algorithms," Mukherji explains.
Brokers/Advisers vs. the Web
But traders aren't the only ones facing competition from technology. Free online trading Web sites, such as Zecco.com, arguably present a threat to the role of brokers and investment advisers, especially in retail investing.
Zecco, which launched in November, not only offers customers up to 40 free stock trades a month (it makes its money off of interest income and options trading fees), it is building a community in which users exchange stock tips and investment advice, albeit anonymously. The site already has more than 30,000 trading customers and close to 50,000 community members; according to chief strategy officer Gabe Balporto, it's signing up 2,000 new trading accounts a week. The typical customer is around 35 years old, male and highly educated.
"With the advent of all these online brokerage firms, the mystique that once surrounded the retail broker has disappeared altogether," says Sang Lee, managing partner of Aite Group. "Instead of focusing on execution, their value-add service is about providing advice, as opposed to being an order taker, and a similar thing is happening on the institutional side."
Online trading will cause brokers' commissions to fall, Infosys' Mukherji says, and that will drive some brokers out of the business and into new careers. "The business will take a bad beating progressively," he contends.
But PwC's Paris compares taking investment advice from unnamed tipsters to "buying a pig in a poke" (this is an idiom from the Middle Ages, when meat was scarce but cats were not; merchants would claim they were selling a baby pig in a bag that actually contained a cat). He also believes brokerage firms are still hiring plenty of brokers for all those clients who want to speak to live human beings.
Within buy-side firms, Jim Mazarakis, chief technology officer at T. Rowe Price, says he sees investment advisers' jobs improving with technology upgrades. Before a recent rollout of a collaboration and knowledge management system called Discovery (based on IBM's knowledge management technology), if a client called T. Rowe Price's call center with a question on an esoteric topic such as a 529 savings plan, the service rep would transfer the client to a specialist who might be unavailable and need to call back.
"The workflow was complicated and customer satisfaction dropped because customers had to tell their story four times before somebody could help them," says Mazarakis. Discovery lets reps quickly find the right specialist and instant message that person, getting an immediate answer without having to transfer the client. Reps can also search databases of frequently answered questions. "Customer satisfaction goes up, the amount of time it takes to resolve the issue goes down and the answer is always the same," Mazarakis relates.
Mazarakis notes that T. Rowe Price's investment advisers have to become increasingly technology savvy as the amount of information that customers can access for themselves on the Web grows. This is good news for the advisers, he asserts. "It creates higher-quality positions that require more technical knowledge and the ability to deal with different types of software and search engines," Mazarakis explains. "It's not the same level of individual that had that job maybe five to 10 years ago." The next wave of technology for investment advisers, Mazarakis predicts, will be customer analytics software used to better understand client needs and help advisers suggest products to clients at the right time.
Research Analysts vs. Software
Wall Street research departments also are under pressure to prove the value of their services and to get people to pay for advice without using soft dollars. "With the unbundling trend, all eyes are on the research groups to figure whether or not it's worth maintaining some of these operations," says Lee. Any cost savings that can be achieved through automation or outsourcing are welcome here, he suggests.
New tools can do some tasks of the research analyst. Gridstone Research, for instance, offers software that can automatically assemble, analyze and structure company information into financial data, guidance and operational data. "I can foresee certain basic jobs in equity analysis, such as trend and ratio analysis and comparison of actual vs. guidance getting automated," says Infosys' Mukherji.
Many of these jobs have already moved to India, where people working for companies such as Reuters manually input data and calculate basic ratios. On Wall Street, Mukherji believes lower-level research analyst jobs -- assistant research analysts or research assistants -- eventually will be lost to software. However, such jobs are often done by trainees and people who just entered the industry, he says. "For many, it's a transitory job before they get an MBA or a different position," Mukherji relates.
The Extensible Business Reporting Language (XBRL) format that makes reports machine-readable could potentially automate research much further. Today, no U.S. companies file XBRL-formatted financial reports to the SEC (although companies are starting to post XBRL documents on their own Web sites), probably because there's no real incentive for them to do so. Nevertheless, XBRL is the future reporting standard, according to experts.
Despite the many jobs on Wall Street that may be threatened by technology, many industry observers feel that technology is creating more jobs on Wall Street than it is eliminating. Where, exactly? "I see more and more hiring going on around electronic trading, architects, strategists for electronic trading -- people who can develop new processes and technologies," says PwC's Paris. Hedge funds, private equity firms and boutique money management firms are all looking for good, experienced people as the hedge funds go public, he says.
There's also clear demand for Java programmers and derivatives traders. And there's a strong need for experienced business analysts to help pull together technical and functional business requirements, notes Aite's Lee.
Another area is the middle- and back-office operations of over-the-counter instruments, Lee adds. "There aren't many people who are knowledgeable about operational processes involving OTC products," he explains.
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