How Technology Is Transforming the Dynamics of the Trading Floor

By Nicholas Larsen, International Banker

It is perhaps among the world’s most iconic and evocative imageries of capitalism in the late 20^th century. Large, noisy venues filled with hundreds of busy traders, some shouting “Buy!” and “Sell!” in the futures pits, while others are on their phones desperately trying to fill their clients’ orders as market volatility wreaks havoc across financial markets. In a word: pandemonium. But do such images still ring true for the trading floors of today? Or are those hectic scenes of stressed-out traders now relics of a bygone era?

While some floor trading still exists, the open-outcry systems made famous in the 1980s are almost completely extinct. Instead, technology has fundamentally transformed the inherent nature of trading—whereas once there were legions of staff manning trading desks, investment banks have shed much of their human-capital resources, trimming headcounts and replacing employees with software and automated trading solutions in pursuit of consistently tighter efficiency gains.

Writing in May 2019, Taran Khera, Bloomberg’s head of Asia sales, described the trading floor automation taking place as a three-stage process:

• Electronification: Transforming unstructured communications, such as manual and voice trades, into more structured electronic formats that can be more efficiently read by machines. In turn, this helps to drive greater workflow efficiency, build liquidity and improve post-trade reporting.
• Automation: Thanks to regulations such as MiFID II (Markets in Financial Instruments Directive II), more is being done to automate trading workflows and thus expand the presence of electronic trading venues. Such automation is proving more cost-effective vis-à-vis manual processes as well as more efficient, accurate and consistent in producing desired results. It also records important information in a quicker, more organised format, helping to improve regulatory-reporting requirements.
• Digitisation: This is mainly directed towards bolstering the decision-making process, thus enabling traders to allocate more time to complex tasks such as deal origination and data analysis. Alternative data is proving hugely beneficial in this regard, with geolocation data and satellite imagery only some of the datasets providing crucial, investible insights. And new visualisation techniques such as augmented-reality and virtual-reality simulations are also opening new doors for data analytics. As this practice continues to become more sophisticated, traders will increasingly want to utilise digitisation to gain a competitive edge.

As is the case with much of the infrastructure supporting the global financial-services industry today, digitisation lies firmly at the heart of the transformation of trading floors worldwide. In particular, it is electronic trading that has proven overwhelmingly popular. This method of buying and selling securities, which is normally carried out through online platforms, has been pivotal in precipitating the decline of the open-outcry trading floor.

For instance, the Stock Exchange of Hong Kong (SEHK) closed its physical trading floor in October 2017 after 31 years in operation as a direct consequence of the rise of electronic trading, with traders being able to enjoy such benefits as higher transaction speeds, lower overall costs for market participants and greater market accessibility across geographical borders. “I have a deep affinity for this place. Every day, coming to work, we all sat side by side and talked all day,” Christopher Cheung, lawmaker and the founder of Christfund Securities, told the BBC at the time. “But, I know that things are changing. And financial technology is also changing. So, even if I am not entirely willing to leave, and to let this place go, we need to adjust and get with the times.”

Automated solutions are also being employed to both complete repetitive, often mundane tasks that in turn frees up time for traders to focus on more complex, high-value responsibilities as well as increasingly make trading decisions themselves. In both cases, the speed, accuracy and endurance of a robot can realise significant improvements in cost and efficiency over a human trader.

Perhaps the most effective technology in this regard is artificial intelligence (AI), which is being used extensively across a variety of trading-floor applications. For one, it is now heavily utilised by quantitative analysts to model asset prices, market trends and risk-management requirements, with algorithms generating various statistical outcomes. AI is also increasingly being employed as the basis for trading advice, with tools being developed that can provide useful market news for trading personnel, who, in turn, can then finetune their search preferences according to, say, specific stocks or other important market metrics. Automated applications can also scour the market in real-time to provide traders with useful trading information, which can prove especially useful in high-frequency, highly liquid market environments, where the fast speeds achieved by such AI tools can often mean the difference between successfully capitalising on a market opportunity or missing out on it altogether.

Furthermore, technology is playing a pivotal role in making the trading floor more accessible for traders of all levels and in all parts of the world. As a result, financial inclusion and democratisation have soared in recent years, meaning that virtually anyone with a smart device and a sliver of capital can trade financial assets such as stocks and ETFs (exchange-traded funds). More recently, cryptocurrencies have provided perhaps the clearest example of how technology has transformed the global nature of trading, completely removing the requirement to be on a physical trading floor. These digital assets, which are typically secured by blockchain technology, can be traded on digital exchanges—both centralised and decentralised—from the convenience of a smartphone. And with blockchain removing the need to involve intermediaries, such as brokers, crypto perhaps represents the most direct market access of any asset class in the world at present.

Indeed, eliminating the need to be physically present on a trading floor is proving to be a significant game-changer, with traders now able to buy and sell from any location using their devices or remote log-in facilities. This has been especially crucial since the start of the pandemic-induced lockdowns that have confined much of the working populations to their homes. Needing full trading capabilities away from the office, then, is only expediting the development of appropriate digital solutions, with new software ensuring seamless transitions to trading from home.

It also means that front-office personnel who work on a more “vanilla” basis, such as execution-only trading, will undoubtedly be feeling the heat from the automated world. If robots can do the same job with more efficiency and competency, then such jobs are likely to be considered endangered as far as human occupation is concerned. At the other end of the scale, however, the trading of structured products is much less susceptible to be taken over by automation, as are any jobs in which the typical day is decidedly non-standardised. “I’m sorry to say that when automation began to affect the real world, at first I thought that drivers would be the first to lose their jobs, because if you have autonomous driving, you don’t need a driver,” Francis Lun, a brokerage owner and industry veteran, told BBC upon the closure of the Hong Kong Stock Exchange’s trading floor in 2017. “But sadly it’s the floor traders who lost their jobs.”

But perhaps the world hasn’t completely called time on the traditional trading floor. In early June, the London Metal Exchange (LME) announced it had cancelled its initial plans to close its open-outcry trading floor, the last such venue in Europe. The world’s oldest marketplace for industrial metals began a consultation process in January to deliberate on whether its open-outcry trading floor should be permanently shuttered due to the success of the migration to digital trading. “The divergent views in response to the Discussion Paper were particularly apparent between traditional participants and some smaller physical clients on the one hand, and our larger merchant trader and financial participants on the other,” LME’s chief executive officer, Matt Chamberlain, said. Nonetheless, the LME still firmly believes that electronic trading represents the future, as recently reported by Reuters.

So, while the robots may not be completely taking over in the short term, the proliferation of new technologies and automated solutions means that dramatic changes will continue to occur across the front, middle and back offices. And the more the need to gain that competitive edge continues to intensify, the more financial institutions will have to evolve with innovative tech-oriented solutions—and the more endangered jobs across the trading floor will become. With electronic trading having all but wiped out the physical trading floor and with technologies such as AI, natural language processing (NLP) and deep learning driving a seismic shift across the industry, the human component of institutional trading floors seems firmly set on an inexorable march towards extinction.

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