By Shane Remolina
Everyone talks about the buzz of the trading room. Sell-side traders have worked in large, physical trading rooms for decades. A small proportion have stood every day, shoulder-to-shoulder on huge exchange floors. But in the span of a few weeks in March, the spread of the COVID-19 pandemic has brought us to the current lockdown, compelling banks and broker-dealers to shift most employees to remote work.
Some banks and brokers have 90% or more of their sales and trading teams, research analysts, investment bankers, and other professionals working from a home or a backup location.
IT departments packed up virtual trading desks with routers and turrets so that traders could access all of their direct dials to counterparties from home. Those who did not have access to internal hoot-and-holler systems, relied upon messaging platforms. CNBC noted that a trader had 50 chat messages open with hedge fund clients. And firms used video conferencing tools like Citrix WebEx and Zoom to conduct meetings with clients.
Firms discovered that even with the majority of employees working from home, they can execute trades for clients and provide liquidity in a stressed market.
On a Q1 earnings call, Cowen & Co.’s Jeffrey Solomon said the firm “had a record quarter in terms of both revenues and trading volumes.”
While this has been a forced experiment, it has raised questions about the future of work, and it’s caused firms to rethink the value proposition of the centralized trading desk. Is this new normal temporary or could this be the beginning of a paradigm shift?
Brokers not only had to react quickly to the COVID-19 outbreak, but they did so while experiencing unprecedented volumes and surges in volatility. In March, U.S. stock exchanges that were handling an average of six or seven billion shares a day, saw volumes spike to 19.4 billion shares on Feb.28, the second-highest level ever, while markets declined 30% to hit their lows on March 23. Some firms saw up to a 3-4 X jump in client volumes, based on anecdotal conversations. Market data went wild as the number of ticks exploded in options.
Amid the massive increase in trading volumes and volatility, exchanges weathered the storm. Thanks to the efforts of Wall Street’s technology, telecom, and operations teams, who deserve a lot of credit for their dedication, the infrastructure underpinning the stock market held up. In contrast to glitches experienced in the 2000s, stock exchanges had no outages in March even though daily volumes hit a record of nearly 16 billion shares per day that month, reported the Wall Street Journal. Safeguards that were put in place after the May 2010 “flash crash” are said to have helped exchanges stabilize the markets in response to extreme bursts of volume and volatility. When the S&P 500 index plunged 7% during the opening minutes of trading, market-wide circuit breakers paused the market four times in March, reported the WSJ in “Post-Flash Crash Bolstered Markets in Coronavirus Selloff.” In addition, single-stock circuit breakers known as “limit up and limit down” halted stocks in March hundreds of times and thus, played a role in dampening volatility during the virus-induced turmoil.
Another reason why capital markets were prepared to react quickly to COVID-19 was the work put into business continuity planning or BCP. While years ago, BCP was viewed as a competitive advantage, now it’s driven by regulation and compliance. In response to regulatory mandates, capital markets firms have invested an enormous amount of money and human resources into BCP over the past 15 years. Firms updated their BCP plans after the Sept. 11, 2001 terrorist attacks and superstorm Hurricane Sandy in 2012, when these events exposed cracks in Wall Street’s contingency plans. Even so, financial firms were more prepared during COVID-19 thanks to Regulation SCI for Systems, Compliance and Integrity. Adopted by the SEC in 2014, Reg SCI applied to stock and options exchanges, certain alternative trading systems, FINRA, MSRB, certain clearing agencies, and disseminators of consolidated market data. The regulator pushed these “SCI entities” to increase testing of their systems, notify the agency of any malfunctions, and prepare continuity plans in case of a disaster.
Remote Trading Technology
Given this backdrop of market resiliency and traders working from home during the COVID-19-fueled volatility, some market observers have questioned the centralized trading desk mentality that has been pervasive on Wall Street. Traders, especially on the buy side, are asking, why return to the desk this summer?
While a very limited number of trading system clients may have needed a little assistance with logging in from home, the abrupt shift to having to work remotely has been seamless at FlexTrade. On the cutting edge of sell-side OMS technology with FlexOMS, FlexTrade has always provisioned the technology and the guidelines to be prepared for remote log-in situations and scenarios as a course of normal business.
The pervasiveness of electronic trading and algorithms made for a frictionless transition on the low-touch side of the business as well. Direct-market-access trading and electronic trading desks executing orders via algos continued with unfettered workflow performance.
With all the workplace tools embedded in workstations, the issue most executive management committees may start to question is: do traders really need to be in the office? Sales and trading desks have tools like Symphony and Bloomberg, as messaging platforms to communicate with buy-side clients. Through buy-side EMSs like FlexTRADER, asset managers and hedge funds have algo wheels for routing orders to the most effective sell-side algorithm. Crossing networks are embedded into OMS blotters to allow the buy side to seek a natural buyer and seller.
It’s true that some traders miss human interaction and the trading desk atmosphere, and some have experienced a sense of social isolation. Without hoot-and-holler to broadcast information across the floor, something is lost. When trying to match blocks by finding the other side of the trade, it’s easier for a trader to turn to the person next to them or on the same physical trading desk. Is a brokerage firm that relies on human relationships for block crossing worse-off than if it focused on DMA? With post-mortem data and metrics, we may be able to quantify these effects in terms of lost business opportunities.
Decentralization and AI
However, the decentralization and spatial displacement of operations and technology teams from trading has been going on for years. Major banks such as JP Morgan and Citi have moved some trading operations staff and back-offices to less costly real estate such as in Brooklyn and Jersey City, while Naperville is another popular lower-cost real-estate solution for Chicago-based firms.
Capital markets firms have upgraded their back-offices and moved them away from their core trading-and-sales operations. Will this accelerate in a post-pandemic environment? What are the implications of this trend in three years’ time? Is it feasible to have compliance and operations personnel operating off the central trading desk?
From a technology perspective, most firms are already automating more of their order flows and relying less on human interaction. Technological advancements have emerged to make trading equities and operations more efficient and less reliant on human-to-human interaction.
This evolution of financial technology may be amplified by the current crisis, ushering in a new era of further innovation. With people working from home or from different remote offices, many minds are thinking about longer-term solutions exacerbated by COVD-19.
There is no doubt that artificial intelligence will play a role in matching trades. Machine learning can scan through vast amounts of historical transaction data or open positions on the sell-side OMS blotter to identify natural buyers and sellers of securities.
If the cash equities desk catches an order in a large block of stock, the trader can walk over to their Delta One desk and have a conversation about the name, or at a minimum, message someone on Bloomberg. Through an API, these types of workflows can, in theory, be made more efficient by amalgamating order flows and information across these and other lines of business throughout a trading organization. This could culminate in scenarios where traders, business heads, risk managers − and other stakeholders in a large scale, complex investment bank and/or broker-dealer − are alerted to opportunities, such as crosses, risk off-sets, and any other core function.
When it comes to managing position risk and client order flow, we see the ever-increasing use of intelligent automation. With its advances in APIs and reputation for flexibility around workflow and technology versus other vendors, FlexTrade expects to be at the forefront of this progression.
Technology to Fill in Compliance Gaps
With the mandate to work remotely, there are some inherent issues around compliance. With all the compliance rules and voice recording software mandated by regulators, it is difficult to police human behavior when traders are working off of a central trading desk. For example, traders are not supposed to use a mobile phone on the trading desk, but this is challenging to enforce at home. Perhaps future technologies, and access to a trader’s location, communications, or other data, will be needed by compliance departments to monitor remote trading. While this raises privacy concerns, it also opens up possibilities for offering fully regulated and compliant trading in a remote environment.
In addition, FINRA, and other vendors, and regulatory bodies continue to advance surveillance techniques, and, services such as the Consolidated Audit Trail or CAT to track trading anomalies, and malfeasant behaviors. Regulators will have massive quantities of data to mine with machine learning algorithms to detect unusual activity, perhaps obviating the compliance arguments for a centralized trading desk.
In the meantime, as states begin to lift restrictions, the financial industry has begun to plan for a safe return to work. But it remains to be seen what a new normal will look like. Depending on when the pandemic is alleviated, remote work could become an integral part of the new reality. This is where the crisis, innovation, and the future of the trading desk intersect.