Why Wall Street Traders Are On The Decline

Wall Street used to be full of

traders

. Buying and selling stocks or bonds in person or in the crowded markets of Chicago, New York and London. Prestigious investment banks boasted of having trading desks the size of football fields. Now they are losing money on trading operations and laying off dozens of

traders

. There's a very famous anecdote from Goldman Sachs, where about 15 years ago they used to have about 500 human traders on a trading floor, creating stock markets and basically connecting buyers and sellers over the phone. And that's going to disappear. You know, obviously with the rise of electronic stock trading and now they have three people.

The number of jobs in trading, sales and research at the top 12 U.S. banks has fallen precipitously over the past nine years. In 2010, those big banks employed about 21,000 people working in stocks (or shares) and 27,800 people working in fixed income or bonds. By the third quarter of 2019, those banks employed about 16,000 people in each category, a drop of about 5,400 jobs in stocks and almost 11,600 in bonds. Deutsche Bank, Citigroup and Societe General are just some of the large financial firms that have announced layoffs on their trading desks in recent months. Deutsche Bank, in particular, decided to shed its entire global share trading operation, around 18,000 jobs in total.

The shift towards e-commerce and passive investing are the big culprits behind this trend. Now, more and more big Wall Street firms are finding it increasingly difficult to make money from trading. Increasing passive investment in algorithmic trading or reducing profits in the trading business to reduce margins. Experts say that e-commerce made markets much more efficient and made commerce more accessible and cheaper for the masses. But the shift toward electronic and algorithmic trading is not without risks. We wanted to see what was happening. We saw real panic a little below 11,000. A quick fall, the boys rushed in to buy gold.

So what's happening to Wall Street's once prestigious trading profession? When we think of Wall Street traders, most people think of this. Known as "outcry," the trading practice began in the 17th century in Amsterdam, on the world's first stock exchange. The Dutch East India Company was the first company in history to go public. After the exchange's creation, investors could fund a group of upcoming Dutch East India Company voyages rather than individual voyages, diversifying their risk and earning dividends. A few hundred years later, stock exchanges had appeared all over the world. And the stock market remained the main means of trading until the 1990s.

You have to understand that negotiation mattered for a long time. In the case of Nasdaq, it was important until the Nasdaq scandal. There was a huge scandal in a nearly $1 billion deal where Nasdaq traders colluded to basically fix prices and set the bid and offer spreads on Nasdaq stocks. Once that deal happened, people had to start handling orders differently. And that gave rise to the so-called electronic communication networks, which were the precursors of modern exchanges. And as more markets became increasingly fair, electronic markets flourished and, frankly, paper bills went the way of the buffalo. Larry Tabb is the founder of TABB Group, a strategic research and advisory firm focused on capital markets.

When you traded on Nasdaq, you actually had to call a market maker. Before they became an exchange in the early 2000s. All it really was was an order routing mechanism and it sent orders to the market maker that had the best price. But each trade had to be approved and then actually traded by a human market maker. Before Reg NMS and around 2005, the New York Stock Exchange still took approximately nine seconds to execute an order. And so, most trading was still done manually, although much of the order routing was done electronically. The National Market Regulation System, or Reg NMS, was the first set of basic rules for American commerce.

It protected and helped investors and ultimately facilitated the transition from computers to trading. Online trading really began to take over thanks to electronic communication networks, personal computers, increased regulation of trading spaces, and the rise of online brokerage firms. Although electronic communication networks or ECNs began in the late 1960s, they did not become widespread until much later. ECNs automatically matched buyers and sellers, eliminating the need for negotiation. Now all stock changes are practically completely automated. The New York Stock Exchange still has the floor, but most of the activity occurs outdoors at closing. Most intraday trading is done electronically.

First, let's talk about our definition of a trader. We're not talking about people who occasionally trade their Robinhood and E-Trade accounts. We are talking about professional investors who buy and sell financial assets for organizations such as hedge funds, banks and private equity firms. According to the Securities Industry and Financial Markets Association or SIFMA, in the 1990s there were 484,500 American employees in the securities industry. As of December 2017, there are 952,500 people working in the securities industry in the US. However, at investment banks there has been a drop in employment. Trader, sales and research roles fell from 49,200 in 2010 to 32,200 in 2019, a decrease of almost 35 percent.

Bonuses on Wall Street have increased enormously since 1989, when the average bonus was $24,928. They peaked in 2006 at $248,223. The average bonus fell to $225,644. As of 2018, that average bonus has returned to around $153,700, however, it's still below what it was in 2017. Since, I would say, 2010, 2011, compensation on Wall Street has been falling. And the reason for this is that the set of fees for trading fixed income and stocks has gone in a direction of essentially lower usage. And when that happens, they have less money at the end of the year to give people bonuses. Bonuses remain at least the majority of what Wall Street's top brass make.

They eat what they kill. One of the recruiters I spoke to said he mentors the people he talks to. They say if you can't win, if you can't make a living from this business, you'll make $300,000 or $500,000, which, by the way, is still a lot of money. And, you know, then, you know, then you should leave the industry. You will never again earn more than a million dollars a year. From 2010 to 2019, fixed income and equity trading revenue at banks such as Bank of America, JPMorgan and Deutsche Bank fell from $149 billion to $83 billion. The move to electronic commerce leaves dozens of floor traders out of work.

If you look at photographs of the trading floor in 2000 compared to today, it is probably a tenth of the number of actual traders. Nowadays, there are more reporters and news columnists walking around, except at the opening and closing. There is almost no activity on the ground. It all happens in Mahwah, New Jersey, where the exchange computers are. All of that is really activity. Everything happens through algorithms and desks above. With computers submitting trade orders, trading volumes have skyrocketed. Before electronification in January 1997, the average daily volume of US stocks was about 1.17 billion shares. In December 2019, there were 6.54 billion shares.

It used to be that traders looking at the screens said this is the price. That price would be where they would enter their order. Today, if you want to trade a million shares of Microsoft, you are not going to place 1,000,000 orders for shares. You're not even going to place a hundred and ten thousand stock orders. You are going to place ten thousand one hundred stock orders. And a computer can do it much faster and without tiring than a human being. The speed of trading is dramatically faster than it used to be, and it has basically taken humans out of that last mile market.

Algorithmic trading is taking over the stock market and it is not without its flaws. The flash crash of 2010 caused the Dow Jones to drop 9 percent in a matter of 36 minutes. The drop was triggered by a large sell order that was then responded to by high frequency trading firms that began buying and selling against each other. Other market makers were unable to intervene, causing the crash. I don't know. There is fear. This is really a capitulation. The machines had to be broken. One night indicates that a technological problem occurred in the company's market creation unit. Since 2010, more sudden accidents have occurred and regulations have been announced to address the problem.

However, no perfect solution has been implemented. Another factor driving the long-term

decline

in trading jobs comes from competition between active and passive investing. Many trading companies use active investing, a strategy that involves closely monitoring individual investments, such as stocks, for profitable opportunities. While it can mean big profits, it can also be quite expensive and risky. Passive investing refers to index funds and exchange-traded funds. They allow investors to buy large stock indices or groups of stocks. It is called passive because they do not need to constantly monitor investments. One of the reasons why technicals and momentum investing could have worked so well over the last decade is that the biggest investors were passive investors or ETFs.

These are investors who simply buy a stock if they see inflows into its underlying ETF. When it comes to pure long-term performance, passive investing is outperforming active investing. Only 23 percent of active funds were able to outperform the average performance of passive funds in the 10 years to June 2019. Many of these trends have reduced the level of participation of institutional investors in the US stock markets. In the US, mainly because they are subject to greater competition from passive funds that do not trade as much. Their fee structures are lower and so more active funds tend to be closer to what passive funds do.

They are trying to renew their portfolio less times so as not to have expensive operations and they are cutting costs and those costs push them more towards electronic channels and more human and more expensive channels. After the 2008 financial crisis, regulators cracked down on cash that investment banks could use for risky bets. If you remember, the financial crisis started in part because of these hugely risky bets that investment banks like Goldman Sachs, B of A Merrill Lynch had made. So when the regulators saw that, they said, look, we have to eliminate this. We created something called the Volcker Rule.

The Volcker Rule actually banned or at least cracked down on hedge fund-type bets that these banks could make with their own money. With banks in need of liquidity, they did not need as much manpower as before. Before the financial crisis, banks provided twice as much liquidity as they do today. So, in numerical terms, you could say that this means that half of the traders who were needed before the crisis are no longer needed. For these reasons, most of the big banks are abandoning the trade. The issue of trade profitability is also a factor driving banks to move into other higher margin areas within their business models.

And really this cost pressure and this deflation is driven by technology. Therefore, it is driven by technological advances that have created a cheaper environment to do everything. It has also been created by price discovery. It is very easy for consumers to look for the lowest cost option. Given the acceleration of the availability of information in the current era. The

decline

in jobs and trade income hurt big banks and large investment firms. Instead, banks like Goldman Sachs are focusing on a new venture: consumer retail businesses. This is still the classic New York investment bank, and something like 40 percent of revenue still comes from trading and dealing in bonds and stocks.

What is Goldman Sachs doing? They are entering mainstream consumer retail businesses, such as marketplaces where they want to collect deposits that are a cheap source of financing and provideloans. So this is a perfect example. If you like Goldman Sachs and its strategy, you're moving toward something a little more diversified, a little less volatile. From one quarter to the next, it is seen that trading can generate a lot of volatility. You will see traditional banks get smaller. You can see the electronic players, the Citadels, the Virtues, the Jumps, the Jane

street

s, the HRTs of the world, I think you'll see them get bigger.

If you look at the trading community that is hired today, it is not the traditional traders with MBA background in finance, they all have a very strong quantitative backing. When we think about the rise of quantitative traders, it is still humans who are developing the algorithms. It is currently built by humans, but could very quickly become pure algorithms that learn on their own through machine learning. It is a very difficult time for the institutional brokerage community. On the other hand, I think it is a very good time for individual investors. I think they are getting better value and all those fees that were going to the brokers on the buy side are actually staying in the investor's pocket.