“You’re sitting in a big room and phones are ringing constantly. There’s a real sense of activity and it’s very loud – you hear brokers and messages over loudspeakers and sometimes, let’s say, the language would not have been acceptable today,” says Christoph.
He began his career in the money markets and fiduciary deposits department at Julius Baer in 1988, and he later moved on to OTC currency option trading. Christoph is currently head of the trading department across all asset classes.
During these early days of Christoph’s career, there was little digital support for traders; every element of trading was manual and required considerable focus and skill. “It was stressful, but also fascinating,” he remembers. “And, of course, there was a lot of paperwork, so you really had to keep your head together, to make sure that you weren’t making mistakes.”
A quieter trading floor
Technology has revolutionised the way traders work, with scenes such as Christoph’s early days consigned largely to documentary footage. Today, many of the processes are fully digitised and trading floors are largely silent. And, with innovations such as big data, machine learning (ML), and artificial intelligence (AI), technology is likely to change the trading environment even further.
According to a survey published in 2020 by Celent, a research and advisory firm focused on technology for global financial institutions, trading technology “is a key competitive differentiator for 82 per cent of those surveyed”, while “in three years, ML/AI will be the highest priority at 79 per cent”. In 2019 research firm Morningstar reported that the total value of passive equity assets, which are led by technology, exceeded the value of those run by human beings.
The inner circle of traders
The financial markets have always worked best when decisions are made based on the most accurate, timely information. “In the 1990s and 2000s, for instance, you always had the feeling that you were a little bit ahead of the outside world in terms of information,” says Christoph.
“You were very close to the political and economic news feeds – the information that mattered most for the foreign exchange and precious metals markets. When you got home, you didn’t need to listen to the radio or TV news because you already knew so much.”
Back then, traders and sales had considerably more information than the outside world about companies and the overall financial markets, which they gained through the firms’ research departments, who would pore over financial reports and interview CFOs and other company spokespeople. They would then use this intel to inform the customer about their findings and get the best deals for them, enhancing their own reputations.
Much of this continues today, of course, but with 24/7 news coverage, instantaneous information transfer, and the general availability of data online, traders today are no longer so far ahead on the information curve.
Impact of trading technology
The access to, and democratisation of, information has been one of the most significant shifts to the trader’s world and, combined with the development of online trading apps and platforms, has enabled anyone to trade from anywhere.
“Now so many more people have access to data and the capability to trade over their computer or smartphone. It’s very easy to set up an account and start buying and selling,” he says. “You can even buy just 0.5 of an Apple share or 0.7 of Bitcoin, if you want to. The market has opened up to customers who haven’t been trading before and it’s added to the market dynamic.”
This increase in market activity, combined with access to technology such as big data, enables markets to draw on a broader pool of information, and this increasingly allows for more accurate pricing, according to Professor Gbenga Ibikunle of the Business School and the Edinburgh Futures Institute at the University of Edinburgh.
“There are more opportunities for markets to benefit from the wisdom of crowds,” Professor Ibikunle explains. “You can now draw on data showing how a company is utilising its resources and assets, for instance. Information can be gathered more easily from data platforms such as Bloomberg as well as social media, and then AI can turn this into usable intelligence.
"Algorithms can note the current price of a stock and compare that with what they believe the true value to be based on the data faster than ever.”
Faster than ever
It is not just the dissemination of information that has accelerated. Execution is also faster because of technology – and is set to speed up even more. Professor Ibikunle says: “Huge trade volumes can now be executed very quickly in order to correct mispricing and create greater liquidity. We carried out research which showed that, thanks to new technology, this correction to mispricing can take place in less than a second, compared to the hours or even days that it took under older systems.”
Christoph is quick to acknowledge the benefits of faster execution. “Being able to react quickly is better for the trader – and the customer,” he says. “Back in 1990 I had to call someone to make a trade, and if they didn’t pick up then it was a real nuisance and delayed the trade, which was frustrating for me and my customers. Today executing a trade takes less than a second.”
However, he also notes that it has changed the nature of the job considerably. “As a trader you need to feel it, you need to feel the heat and the excitement. Back when I started you actually had the paper in your hands and the brokers were screaming around you, and so you really felt that you were making a trade.”
The ability to execute transactions at the click of a mouse or tap of a smartphone has removed much of the thrill and emotion from the process. In the days of noisy trading floors, the industry hinged on human interactions and close working relationships. Today, the industry relies more on technology; pricing is automated, booking is automated.
The majority of communication with clients is done via an API (application programming interface, ie a software intermediary). If the systems go down, things suddenly become incredibly challenging.
The counterpoint is that there are enough experienced traders who have lived and worked through crises to have a good sense for how things work and can keep working under the most trying circumstances. But it will not be so easy for new traders to gain this valuable market instinct while sitting alone at a terminal. “It is very difficult to become a trader today,” says Christoph.
“For somebody who doesn’t know the business at all coming in, it’s extremely difficult to get a feel from just looking at numbers and charts changing on a screen. The heat is missing.”
New traders also need to be able to combine the analytical, systematic skills needed to work with the technology with the human touch. “Automation, ML, AI, and efficient processes are all facilitators for traders. Innovation allows us to understand situations faster and in more detail, but that needs to be combined with experience.
"Traders need the human experience that helps them to actually avoid damages, big damages, because at one point we may find that the computer system fails for whatever reason and we need to rely on the old, manual skills once again.”
Value of the human brain
The increasing reliance on technology over humans is also concerning regulators, leading to increasingly complex and rigorous regulatory requirements. “Legally, the regulators are looking closely at the resiliency risks of relying on technology, both for individual firms and for the financial system as a whole,” says Simon Treacy, senior lawyer in law firm Linklaters’ global financial regulation group.
But regulators are running to keep up with new developments. “There are also complex legal questions about how the use of some new technologies, such as blockchain, fit into legal structures that were not written with them in mind.” With new technologies and capabilities being deployed almost daily, this schism is only likely to grow.
Does Christoph see a time in the future when automation will make traders obsolete? No. “Technology is bound to reduce the number of professional traders in the world,” he says. “The number of apprentice traders is already decreasing dramatically and I think that will continue – up to a point. “There will of course be some businesses where it doesn’t make sense to have human traders because the margins are so tight that machines are more efficient.”
But for other product areas that are more complex and require risk-taking skills, such as non-linear products, he sees human traders remaining: “In my opinion, the human brain is still needed for these complex trading situations. I don’t see that changing.”