Wall Street used to
be full of traders. Buying and selling stocks or bonds in
person or in the packed trading pits in Chicago, New
York and London. Prestigious investment banks boasted of
trading desks the size of football-fields. Now, they're losing money
on trading operations and laying off scores of traders. There's a very famous anecdote out
of Goldman Sachs, where about 15 years ago they used to have about
500 human traders on a trading floor, making markets in stocks
and basically connecting buyers and sellers using the telephone. And that's going away. You know,
obviously with the rise of electronic trading in stocks and now
today they have three people. The number of trading, sales and research
jobs at the top 12 U.S. banks have dropped precipitously in
the last nine years. In 2010, those big banks employed
about 21,000 people who worked in equities — or stocks — and 27,800
people who worked with 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 equities and nearly
11,600 in bonds. Deutsche Bank, Citigroup and Societe General
are just a few of the big financial firms to announce t
rading desk layoffs in recent months. Deutsche Bank, in particular,
decided to ditch its entire global equities trading operation ,
about 18,000 jobs in total. The shift to electronic trading and
passive investing are the big culprits behind the trend. Now more and more big Wall Street
firms are finding it harder and harder to make money from trading. The rise of passive investing
in algorithmic trading or squeezing profits in the trading business
to razor thin margins. Experts say electronic trading made
markets much more efficient, and it's made trading more accessible
and cheaper for the masses. But the shift to electronic
and algorithmic trading isn't without risks. We've wanted to see
what was going on. We saw some real panic
a little below 11,000. A quick dip guys came in
to buy gold in a hurry. So what's happening to Wall
Street's once prestigious trading profession? When we think of traders
on Wall Street, most people think of this. Known as 'open outcry,' the negotiation
practice was started in the 17th century in Amsterdam at the
first stock exchange in the world. The Dutch East India Company was the
first company to go public in history. After the creation of
the exchange, investors could finance a group of upcoming voyages by
the Dutch East India Company instead of individual voyages, diversifying their
risk and return received dividends. A few hundred years later,
stock exchanges had popped up all around the world. And the stock exchange remained the main
set-up for trading up to the 1990s. You have to understand that
negotiation mattered for a long time. With Nasdaq, it mattered
up until the Nasdaq scandal. There was a big scandal in
an almost billion dollar settlement where the Nasdaq dealers were colluding to
fix the prices basically, and fixed the bid offer
spreads on Nasdaq stocks. Once that settlement happened, people
had to start handling orders differently. And that gave birth
to what's called electronic communication networks, which were the
precursors to the modern exchanges. And as more and more
markets became more and more fair, electronic markets blossomed and frankly,
paper tickets went the way of the buffalo. Larry Tabb is the
founder of TABB Group, a research and strategic advisory firm
focused on capital markets. When you traded on Nasdaq, you really
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 routed orders to the market maker
who had the best price. But each trade had to be okayed
and then traded really by human market maker. Prior to Reg NMS and
around 2005, the New York Stock Exchange still took roughly nine
seconds to execute an order. And so most trading was still done
manually, even though a lot of the order routing was
done electronically. The Regulation National Market System, or
Reg NMS, was the first set of ground rules for U.S. trading. It protected and helped
investors and ultimately smoothed the transition of
computers into trading. Online trading really started to
take over thanks to electronic communication networks, personal computers,
increased trading pit regulation and the rise
of online brokerage firms. Although electronic communication networks or
ECNs started in the late 60s, they didn't become
mainstream until much later. ECNs automatically matched buyers and seller
s, removing the need for negotiation. Now all equity changes
are pretty much fully automated. The New York Stock Exchange
still has the floor, but most of the activity occurs in
the open in the close. Most of the intraday
trading happens electronically. First, let's talk about our
definition of a trader. We're not talking about people
who occasionally trade on their Robinhood and E-Trade account. We're talking about professional investors
who buy and sell financial assets for organizations like hedge
funds, banks and private equity firms. According to the Securities
Industry and Financial Markets Association or SIFMA, there
were 484,500 U.S. employees in the securities
industry in the 1990s. As of December 2017, there are
952,500 people working in the securities industry in the U.S. At investment banks, however, there's
been a drop in employment. Traders, sales and research roles dropped
from 49,200 in 2010 to 32,200 in 2019, a decline
of almost 35 percent. Bonuses on Wall Street increased vastly
from 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
made its way back to around $153,700, however it's still
down from 2017. Ever since I would say 2010,
2011, compensation across Wall Street has been falling. And the reason for
that is the fee pool for fixed income and equity trading has gone
in one direction of using essentially lower. And so when that
happens, they have less money at the end of the year
to give people bonuses. Bonuses are still at least the lion's
share of what senior people on Wall Street make. They
eat what they kill. One of the recruiters I spoke to
said, you know, he counsels the people that he's talking to. They say, like, if you can't make,
if you can't live on this business, making $300,000, $500,000 , which,
by the way is still lot of money. And, you know, then, you
know, then you should leave the industry. You're never going to make
a million dollars a year plus anymore. From 2010 to 2019, trading
revenues in fixed income and equities at banks like Bank of
America, JPMorgan and Deutsche Bank have dropped from $149
billion to $83 billion. The move to electronic trading puts scores
of floor traders out of a job. If you look at pictures of
the trading floor in 2000 versus today , it's probably a tenth
the number of actual traders. Today, there's more news reporters
and columnists walking around except for the open and the close . There's almost no activity that
happens on the floor. It all happens in Mahwah, New
Jersey, where the exchange computers are. That's all really activity. It's all happening by
algorithms and upstairs desks. With computers filing trading orders,
trading volumes have soared. Prior to electronification in January 1997
, the average daily volume in U.S. equities was around 1.17 billion shares. By December
2019, it was 6.54 billion shares. It used to be
that traders looking at screens would say 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're not going to do 10
hundred thousand share orders. You're not going to even do
a hundred ten thousand share orders. You're going to do ten thousand
one hundred share orders . And a computer can do that far
faster without getting tired than a human being. The velocity of trading
is dramatically faster than it used to be, and it's basically taken
humans out of that last mile market. Algorithmic trading is taking over
the stock market and it's not without flaws. The flash crash of 2010 caused the
Dow to plunge 9 percent in a matter of 36 minutes. The drop was triggered by a large
sell order that was then met by high frequency trading firms who started
buying and selling to each other. Other market makers weren't able
to step in, resulting in the crash. I don't know. There is fear. This
is capitulation, really. The machines had to be broken. A night indicates that a technology
issue occurred in the companies market making unit. Since 2010, more flash crashes
have occurred and regulations have been announced to deal
with the issue. However, no perfect solution has
been put in place. Another driver of the long-term decline
in trading jobs comes from the competition between active
and passive investing. Many trading firms use active
investing, a strategy that involves tracking individual investments like
stocks closely for profitable opportunities. While it can mean big
profits, it can also be quite costly and risky. Passive investing refers to index
funds and exchange traded funds. They allow investors to purchase large
stock indexes or groups of stocks. It's called passive because
they don't need to constantly monitor the investments. One of the reasons the technicals
and momentum investing might have worked so well over the last
decade is that the biggest investors were passive or ETF investors. These are investors that simply buy
a stock if they're seeing inflows into that their underlying ETF. When it comes to pure performance
over the long haul, passive investing is beating
out active investing. Only 23 percent of active funds could
beat out the average return of passive funds in the 10
years before June 2019 . A lot of these trends have kind
of push down the level of participation by institutional investors
in the U.S. equities markets, mostly because
they're under greater competition from passive funds which
don't trade as much. Their fee structures are lower, and
because of that, the more active funds tend to benchmark closer to
what the passive funds do. They're trying to turn over their
portfolio fewer times so that they don't have their expensive trading and
they're cutting costs and that costs push them more towards electronic
channels and more human and more expensive channels. After the financial crisis of 2008,
regulators moved to crack down on the cash investment banks could
use for risky bets. If you remember, the financial crisis
was started in part because of these hugely risky bets that investment
banks like Goldman Sachs, B of A Merrill Lynch had taken. And so when regulators saw that know,
they said, look, we have to cut this out. We created something
called the Volcker Rule. The Volcker Rule really prohibited or
at least tamp down the hedge fund like bets that these banks
could do using their own money. With banks strapped for liquidity, they
didn't need as much manpower as before. Prior to the financial
crisis, banks provided double the liquidity that they provide today. So on a numbers basis, this arguably
means that half of the traders that were required prior to the
crisis are no longer necessary. For these reasons, most big banks
are moving away from trading. The profitability question for trading is
also a driver of banks moving into other higher margin
areas within their business models. And really this cost pressure and
this deflation is driven by tech. So it's driven by technological advances
that have created a cheaper environment in which
to do everything. It's also been created
by price discovery. It's very easy for consumers to
shop around for the lowest cost option. Given the acceleration of
information availability in today's day and age. The decline in trading
jobs and revenue hurt the big banks and large investment firms. Banks like Goldman Sachs instead are
focusing on a new venture, c onsumer retail businesses. This is still the classic white
shoe New York investment bank, and something like 40 percent of the
revenue still comes from trading and trading bonds and stocks. What is Goldman Sachs doing?
They're moving into mainstream consumer retail businesses like markets where
they want to gather deposits which are a cheap source
of funding and make loans. So this is a perfect example. If you like Goldman Sachs and
their strategy, they're moving into something that's a bit more diversified,
that's a little bit less volatile. From quarter to quarter, you
see trading can result in a lot of volatility. You're going to
see the traditional banks get smaller. You can see the electronic players, the Citadel's,
the Virtu's, the Jumps, the Jane streets, the HRTs of the world,
I think you're gonna see them get bigger. If you
look at the trading community that's being hired today,
they're not the traditional traders finance MBA background, they
all have a very strong quantitative backed. When we think about the rise
of quantitative traders, these are still human beings that are
developing the algorithms. It's currently built out by humans,
but it could very quickly turn into pure algorithms that learn
on their own through machine learning. It's a very difficult
time for the institutional brokerage community. On the other hand, I think
it's a really good time for individual investors. I think they're getting better value
and all those fees that were going to brokers into the buy
side are actually staying in the investor's pocket.
From the video description -
TL;DR available technology to the every day joe = no more Wall Street Traders