The MIT piece was based mostly on an interview with Goldman’s CFO Marty Chavez, and it’s true that since 2000 they have gone from 600 to just two human equity traders. They also have 200 computer engineers maintaining the arrays of AI traders at work. But in an exclusive interview with Next Money, Carver explains that equities are special.
“Although equity trading is now dominated by algorithms there are limits to what can be achieved in other markets where algos have been slow to catch on.”
“The multiplicity of trading venues, existence of dark pools, and complex order rules in equity markets have created opportunities for algos. In contrast futures markets are centralised with relatively straightforward rules, resulting in a more even playing field for humans.”
“Currency trading presents other problems for algos. Most trading is done in the “over the counter” markets by large banks and funds where most of the available liquidity isn’t openly displayed. Particularly for larger trades there is an advantage to “feeling out” the market, something that is difficult for robots to do.”
“The fixed income markets have other difficulties. There are a large number of thinly traded issues and efforts to move fixed income on to centralised electronic trading venues have been painfully slow. Trading an asset electronically is a necessity without which automated trading is impossible.”
“Humans will never be squeezed entirely out of financial trading, and the most successful trading firms will be those that can utilise both humans and machines. Humans guiding and switching between several relatively simple algorithms have the potential to outperform both computers and unaided traders.”
But Carver isn’t blind to the opportunities for AIs that remain. In particular, he’s eyeing up the Initial Public Offering sphere.
“The book building process used by investment banks to price IPOs is very cumbersome. In principal this could be replaced by an auction process which could easily be automated: an eBay for IPOs. Google used an auction process for its IPO in 2004 but the idea has not caught on.”
“Stock IPOs are highly lucrative for investment banks as they cost between 5 to 7% of the value of the offering – more than a hundred times what it costs to trade stocks in the secondary market. A more transparent IPO process would put downward pressure on these costs – which is perhaps why it hasn’t happened before.”
“At its highest level investment banking is ultimately a relationships business which is about people. But even lower level investment bankers are doing tasks which are hard to automate, as for example the financial models used are virtually bespoke for each transaction.”
As you can see, there’s still a lot of scope for humans in the finance sector. But saying that, if a reader doesn’t make an eBay for IPOs I might just have to do so myself!
Robert Carver is an expert on systematic trading, a former head of fixed income at multi billion dollar quantitative hedge fund AHL, a former investment bank trader, and the author of ‘Systematic Trading: a unique new method for designing trading and investing systems‘