Technology and globalisation have already transformed trading. What will happen next?
I first set foot on a trading floor in 1976. Needless to say things have changed a little since then…
This evolution has been driven by a number of factors, including the needs and expectations of traders, the changing regulatory environment and changes in market structure.
Over the past 20 years, trading floors have undergone a dramatic period of change. Perhaps most noticeably, floor sizes in some of the largest financial institutions have more than doubled, in some cases from around 850 desks to nearly 3,000.
This growth has been driven both by pressure to improve efficiency and by technological advances in hardware, software and within the network.
These drivers in turn affected much more than just the size of the trading floor, influencing a wide range of elements from the floor’s appearance, to its function and communication process.
There is no doubt that the recent recession may have caused firms to re-examine or put a hold on technology investments, but what is happening now that the effects of the recession are fading? What does the trading floor look like now and what will it look like in years to come?
Increased globalisation in the financial services sector and society as a whole has led to an “always-on” culture
As the financial services industry starts to bounce back from the recession, much has been made of the renewed growth being seen in some of the major financial institutions. Budgets are on the rise and many organisations are beginning to think about investing in the trading floor once more.
However, the legacy of the financial crisis is that banks remain under pressure to be as transparent as possible and to improve both their efficiency and productivity.
To streamline operations and economise as much as possible, many larger banks are consolidating multiple floors of trading desks into one pan-regional floor.
Numerous financial institutions across the US and Europe have recently moved their traders to one trading floor and this consolidation is beginning to be rolled into the back office, too.
Despite this trend towards consolidation, there has also been an increase in the number of smaller firms emerging in the financial industry.
Driven by the recent downturn and related redundancies, many traders in both the US and UK have set up boutique firms which typically have a trading floor size of fewer than 10 desks.
Already widely reported on in the US, these boutique firms are often staffed by traders who, as bonuses were cut and wages frozen, felt that their salary at the larger firms did not adequately reflect the specialised expertise and amount of revenue they brought in as individuals.
In some cases, whole teams are jumping ship to set up their own firms because they feel that their ability to operate is being hampered by the increased scrutiny from both inside and outside the larger organisations.
It is not yet clear which trend will, ultimately, have a greater impact on the market landscape, but it is likely to remain fragmented for some time, with some of the smaller firms proving highly successful and others fading away, or being swallowed up by larger institutions.
Voice trading will still have a place in the future because for some deals people just need the reassurance of speaking to a human being on the phone
There has been a great deal of speculation recently about the future of voice communications on the trading floor, especially since the proliferation of electronic trading.
The vast profits being seen from new and alternative electronic venues are giving those on the buy-side a host of different options to consider when making trades and some are convinced that voice trading will fall by the wayside.
On the contrary, I don’t believe that we’ve seen the last of voice trading. Despite the ever-increasing volumes of electronic trades, voice trading will still have a place in the future because, at the end of the day, for some deals people just need the reassurance of speaking to an actual human being at the other end of the phone.
Especially in more volatile times, those on the sell-side are much more likely to want to have a conversation with an actual person in order to talk through deals and get real-time advice before committing to a trade.
Also worth noting is the fact that with an increase in competition and decrease in margins, the deals traders are creating are getting more complicated. This, in turn, increases the need to collaborate verbally with numerous other parties, including traders who work in different asset classes, analysts, economists as well as research teams.
With so many parties involved, regulatory pressure and the drive towards greater transparency requires that the compliance and credit teams remain more in the loop to ensure that internal rules and regulatory requirements are strictly adhered to.
Increased globalisation in the financial services sector and society as a whole has led to an “always-on” culture, which is reflected in the new longer office hours of many financial institutions.
In the future, more trading floors will operate 24 hours a day across multiple time zones, in a bid to remain as competitive as possible and to make the most of every second of trading time.
Another trend that we’ve already started seeing more of is a move towards increased collaboration and communication between the front and middle office on the trading floor.
Traders now loop in analysts, researchers, risk managers, economists, private wealth managers and other off-floor support teams to discuss each stage of the trading process.
The higher the level of inclusion in the deal, the less likely the deal will be held up with a compliance issue and the more likely it will be successful.
Banks are facing pressure to show ever more transparency and effectively manage risks, leading to the need to monitor the actions of all traders
Since the recession, we have also seen increased levels of regulation and, as a result, an increase in the implementation of strict compliance measures.
Banks are facing pressure to show ever more transparency and effectively manage risks, leading to the need to monitor the actions of all traders. This monitoring is likely to come in the form of recorded video capture of traders’ screens, e-mail capture and IM.
Regulation in today’s market seems to be pulling in two different directions.
In European markets, an increased demand for accountability has led to the requirement to record all voice trading. However, in the US markets regulation is less prevalent, with no requirement to record voice trading.
This difference in regulation levels also has a knock-on effect to the type of trading in each country. Whereas in the UK all trading has to take place on the trading floor so it can be recorded and monitored, in the US there is no such regulation and remote working of traders is a real option that many firms take advantage of.
Time will tell who will follow who in terms of adopting more regulation. But the expectation is that regulation is on the increase. This could either reduce the capability for remote trading in the US or, what is more likely, require additional regulation to account for, support, and possibly even require remote trading capabilities.
The technology is certainly there to support a more regulated form of remote working, and as flexible working seems to be an overarching professional trend, perhaps we will see an increase in remote trading across the board.
Research and development
As I mentioned earlier, many organisations are beginning to look at investing in the trading floor once more, often led by internal research and developmen
These teams realise that it is their technology that will provide them with a truly competitive edge. They are eager to innovate and are beginning to work with technology developers to create solutions that are unique and specific to their organisation.
This collaboration with third parties will open up the technological possibilities for companies who are looking to develop an array of applications that can integrate with their existing systems and enhance their service offerings.
It’s clear that the trading floor is being pulled in a variety of different directions by many influencers. Technology will be the key to pushing the floor forwards.
None of the changes cited above would be possible without the right technology to support them. It is technology, for example, that allows the trading floors to change in size and shape, that enables the communication between all those in the compliance chain and that will make further recording and regulation possible.
Technology will continue to play a key role in the development of the financial trading floor, as it has in its evolution to date.
Financial institutions depend on access to both a fast and reliable network infrastructure, and hardware systems which are dependable, flexible and scalable.
Kevin Acott is the European managing director of trading technology and network services provider IPC Systems.