Robots Have Not Taken Over Wall Street
Technology has fundamentally changed the financial markets over the past two decades. By and large, these changes have been positive – lower trading costs for investors, a reduction in errors, greater transparency and an overall reduction in systemic risk.
But recent volatility has reignited a decade’s old conversation about what impact automated trading has on the market. As a result, talk of robots taking over Wall Street has accelerated – in boardrooms, on trading floors, on Twitter, and in Davos. However, while the impact of technology on Wall Street should not be understated, humans remain firmly in control.
First, trust still drives trading. Even for those firms that rely on banks and broker-dealers solely for access to their trading algorithms, personal relationships must still be established that leave the customer comfortable with their counterparty’s ability to consistently deliver that technology. Both in those developing the algorithms, and those who might help with issues or advice on how to use them most effectively. The skill sets of those on either end of the phone – or chat – are different today, but their need to build trust is not.
Second, while the growth of electronic trading around the world across a variety of products is unprecedented and will continue, a tremendous amount of deal flow is still negotiated bilaterally between two human beings. From an institutional investor’s perspective, three-quarters of US corporate bond trades (by volume), two-thirds of global equity trades (by volume) and all collateralized loan obligation (CLO) trades are still communicated and agreed upon bilaterally between people. Technology is certainly making those interactions smarter and more informed. The level of data both sides of any given trade have today is immeasurably higher than it was 25 years ago. Data mining, artificial intelligence, advanced analytics and the power of cloud computing have most certainly improved the quality of information available to market participants. But in the end, the humans decide what to do.
And that human element is the most important thing to understand with regards to technology on Wall Street over the next decade – it will increasingly help the humans, not make them obsolete.
Technological innovation has changed how we invest, analyze securities, allocate portfolios, trade and communicate with each other. In most cases, it has eased friction in the process, allowing the global financial system to expand and innovate more quickly than ever before. The access both retail and institutional investors have to investment vehicles is amazing if not sometimes overwhelming.
But ultimately people are still wired to look to others for assurances they’re doing the right thing. We ask financial advisors for advice and buy cars at the dealer rather than online. Similarly, hedge fund managers talk to algorithm providers to make sure they really understand what they’re getting and banks still need to trust the people behind their high-speed trading partners. So while the robots are certainly multiplying, people remain people and the people are still in charge.