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5 ways electronification will shift the role of the trader

  • Posted on December 3, 2018
  • Estimated reading time 4 minutes
electronification-will-shift-the-role-of-the-trader

This article was originally published in Trader Magazine.


The New York Stock Exchange attributes “the human element” for “lower volatility, deeper liquidity and improved prices,” but anyone following the markets can see that trading is well on its way to full automation – for good reason too. A recent survey from Liquidnet found 63% of the global asset management firms surveyed (representing $1.3 trillion AUM) plan to switch to greater trading automation. The electronification of trading offers a slew of benefits for both buy- and sell-side firms as well as market makers and investors. Equities serve as a great case study; the first to incorporate electronic trading, they’ve since seen prolific growth in trade volume, lower margins, and higher returns for investors.

But this isn’t a piece about robots or tech taking away jobs; in fact, just the opposite - traders aren’t going away. The markets are a long way from reaching the operational efficiency of a truly automated system. But the role of the trader will shift as they become supervisors of the new market makers: algorithms. If handled correctly, algorithms can act like gas on a trader’s intellectual fire, fueling the human’s ability to draw smarter conclusions based on better data. Despite the fear that legacy thinking can cause, algorithms aren’t trader killers, but rather trader enablers. Here are five ways electronification will shift the role of the trader:

1. Traders as analysts
The human act of trading requires extensive time and attention to detail. As more market participants adopt digital and algorithmic- or data-based tools, trades will happen faster and at greater scale than ever before. Reporting those trades will be faster, as well. Regulating bodies including FINRA and the SEC require that exchange trades be reported no later than 10 seconds following trade execution. Real-time trade reporting is time consuming for market makers and sell-side firms, but electronification alleviates that administrative burden, and keeps the time between execution and reporting down. Through electronification, firms can reduce compliance mishaps as technology automatically stores, distributes and reconciles trading information in the trade reporting platform.

The human will be unseated by the technology – sort of. Instead of executing and reporting trades, traders will allocate newly available capacity to focus on forecasting, analysis, and quality assurance, all important fragments of operating a sustainable trading environment. As humans focus on analysis over execution, the industry will also see reduced rates of human error.

2. Traders as teachers
Thanks to digital and social media, traders – human and robotic – have real-time access to any market-moving news. Though natural language processing is learning quickly, humans are better able to use their judgement in reviewing media sentiment and teaching the algorithms. This is an area where humans aren’t likely to ever be replaced: traders are more adept at spotting systemic trends from non-structured data – like market moves affected by geo-political events – and automation will allow them to spend more time doing this.

The same aspects of technology that make it difficult for robotics or programs to read sarcasm or sentiment also make them less prone to uncertainty. These days, algorithms can see past a bias or hesitation by leveraging historical data to optimize forecasts. This can limit market volatility due to microevents.

3. Traders as advisors
Instead of executing the trade process, traders will be overseeing transactions. Tools will evolve and roles will change, but human interaction will still be the backbone of trading. Equity prices are, after all, based on human sentiment, so having access to fellow humans will drive confidence in the market.

4. Traders as IT professionals
Robotics and algorithms are not replacing humans, they are alleviating humans of work which technology can help accelerate or automate. As supervisors overseeing and working alongside these tools, traders will need much more technological knowledge. If something goes wrong, traders know the process inside and out, and thus will need to work with the tools to fix any issues.

5. Traders as mental health practitioners
This digital transformation will lead to career renaissances for traders. With technical aspects of the job offloaded to technology, traders will take on more responsibility and value-adding roles (e.g., data and market analysis vs. rote reporting). Traders will learn new skills, such as IT troubleshooting. They may even be able to learn certain skills, such as conscious indifference about “hype” events. With an increased sense of importance as market controllers. All this is great for the mental health of traders themselves.

There’s also a psychological impact on individual investors in both primary and secondary markets. Despite horror stories about AI, humans do see value in and trust technology. Knowing that a powerful algorithm is performing the trades gives investors confidence. In addition, e-trading removes geographical restraints that are imposed on investors and allows for continuous end-to-end interaction.

While traders might not be shouting buy and sell orders on the floor, the role of the trader has evolved – not lost its value entirely. Traders will continue to stay relevant for as long as the markets are open and the bells are ringing, but not without a major shift in purpose and responsibility. As trading technology adoption ramps up across all asset classes, the intermingling relationship between traders and their digital tools is poised to remain mutualistic for the foreseeable future.

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