The heads of trading and foreign exchange surveyed at the TradeTech FX Conference in Miami have reached one consensus: automation is a growing trend in the currency markets, particularly for foreign exchange trading operations.
Banks that have moved to automate their foreign exchange and rates trading departments include Barclays (NYSE: BCS)and UBS (NYSE: UBS). MarkitServ, the derivatives trade-processing branch of IHS Markit (NASDAQ: INFO), also recently announced that it will fully automate settlement and margin payments for its cross-currency swaps. Minimizing human intervention in traditional trading exchanges (taking place over the phone) in the era of intense regulations has seemed the wisest move for senior bankers.
As electronic and algorithmic trading becomes more heavily utilized, headcounts for front-office sales, trading, and research will all be cut by a quarter. The recent smattering of scandals involving traders engaging in currency rigging, such as the HSBC (NYSE: HSBC)front-running scandal, have resulted in billions of dollars of penalties, serving as further argument in favor of automation. Workers who witnessed but had no direct involvement in such scandals are increasingly anxious about compliance with regulations.
Automation in the form of replacing human labor with robotic or technological labor is a global trend across many industries, producing more tangible products than the currency markets. This trend also applies to the currency market, where automation is the most profitable next step. In order to continue improving on how to best serve their shareholders, money managers must resort to automation to execute tasks that come far less naturally to humans than to machines, while keeping hiring costs down and reducing the possibility of penalties.
Many top dogs in investment banking believe that there will be "further and faster automation" of much of the field. This push towards digital trading is driven in large part by the rigging scandals.
Together, these two forces are working to "reshape" what was once an "opaque but lucrative business" into a field that is both more "heavily regulated" and far less risky. Simultaneously, with increased security in the activities comes increased job cuts: the broker position is becoming increasingly obsolete. Margins in automated trading are lower, which automatically stacks the cards in favor of banks with the largest scale, and algorithms are being relied upon to determine trade, rather than human judgment. Notably, automation in high-frequency, mostly digitized trading can also cause increased volatility, due to the machine's tendency to "just do things."
However, leading lights in investment banking admit that the shift towards digitization does not equal "zero touch." People still acknowledge the importance of having sales people speaking with their clients.