A senior derivatives trader, interviewed recently by Risk, was asked how he thought the derivatives market would develop over the next five years. His response was a spin on an old joke - each desk will comprise a sophisticated trading model, a trader and a dog. The model will make all the trading decisions; the trader acts as a back-up in case the model crashes; and the dog is trained to bite the trader if he or she tries to touch the model in any other circumstance.
It may be a light-hearted take on the development of the industry, but parts of his prediction already seem - perhaps worryingly for traders - close to reality. In the equity markets, dealers have been using algorithmic models for some time to optimise the execution and timing of client orders. Elsewhere, structured products based on the returns generated by rules-based, quantitative trading models are becoming increasingly popular with retail, high-net-worth and institutional investors (see page 88).
And, perhaps in a sign of things to come, interdealer credit derivatives broker CreditTrade and electronic trading platform Creditex announced in July that they are merging to create a single company offering voice broking and electronic execution services in the credit derivatives market. This last example doesn't cut out the need for human traders - not at this stage anyway - but will facilitate the automation of execution and settlement.
The benefits of technology are manifold: speed of execution (trades can be completed in tenths of a second), automated confirmation and settlement, and quick, objective decision-making. However, some dealers and asset managers argue that the strengths of trading models are also their weakness - in making objective, rules-based trading decisions, the models are unable to replicate the judgement, intuition and gut instinct of experienced traders.
It's true that, in the derivatives markets at least, models are unlikely to be able to fully replace human traders. But that doesn't mean derivatives houses can afford to stick their heads in the sand. The march of technology is relentless, and computers are performing tasks that couldn't even be imagined a few years ago. Banks need to keep pace with innovation, embrace it and employ it on their trading desks.
It may mean a reduced head count in the long term - but traders won't be alone. Data providers Thomson and Reuters recently revealed that they are using computers to write simple financial stories for their news services. Maybe it's time we all got used to the idea of sharing our desks with a Rottweiler.
- Nick Sawyer, Editor
This month marks the fifth anniversary of the September 11, 2001 terrorist attacks. We'd like to pay tribute to all our Risk Waters Group friends and colleagues who were attending the Waters Financial Technology Congress at Windows on the World, on the 106th floor of the north tower of the World Trade Center: Sarah Ali Escarcega, Oliver Bennett, Paul Bristow, Neil Cudmore, Melanie de Vere, Michele du Berry, Elisa Ferraina, Amy Lamonsoff, Sarah Prothero, David Rivers, Laura Rockefeller, Karlie Rogers, Simon Turner, Celeste Victoria, Joanna Vidal and Dinah Webster.
We also remember the 65 delegates, speakers, sponsors and exhibitors that so senselessly lost their lives.
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