Artificial Intelligence: will trading robots soon replace human traders?

Artificial Intelligence: will trading robots soon replace human traders?

In recent years an important phenomenon has been at work, in the finance world as a whole, and in particular on the finance markets. And as the days tick by, it is getting bigger and bigger. We are talking about the automation and use of computer programs in the trading rooms of banks and other financial institutions.

Then… and now

Here are some of the things you’d see and hear in the not-so-distant past: trader, bonus, cash, Ferrari, Lamborghini, luxury, life in the fast lane, Rolex, bikini-clad women on yachts in St-Tropez…

And here’s what’s been zipping around for a while now and that you’ll hear more and more in the trading world: artificial intelligence, AI, virtual machine, machine learning, programming, robots, algorithms, big data, automation, IT...

Not quite so exciting now as it was then! And a far cry from Gordon Gekko or the Wolf of Wall Street.

The message is clear: 3,000 jobs were lost on Wall Street in the space of 4 years, many of which were traders. Goldman Sachs, for example, employed 600 stock traders in the year 2000. There are now only 2… assisted by 200 computer programmers!

So, what has gone on in this high-flying past-paced money-making industry? What is left of the uber-rich trader fantasy?

Welcome to the robots

It’s more-or-less self-explanatory, yet some elements need clarification. These days bank traders spend most of their time placing and executing buy and sell orders for their clients. Speculation is frowned upon because of recent laws which force banks to minimize risk and prevent them from playing around with their clients’ money! Traders have become “market operators” who simply execute orders. “Market-making” is now in the hands of financial engineers and IT developers who create trading algorithms and have automated the placing and executing of their clients’ orders. Human intervention is quite unnecessary!

There is, however, more to it than simply executing orders. These statistical models and IT programs absorb huge amounts of data to predict where the markets are going and future trends. These machines can capture and analyse all types of web data – news, tweets, reports, TV shows, interviews with people of influence, etc. And they can do this 24 hours a day, 7 days a week, an impossible task, of course, for us humans. It is clear, then, that even for speculative purposes, for companies and funds such as hedge funds, these robots can be of great value, crucial, even, if they want to remain at the cutting edge of this sector.

Moreover, humans tend to be biased, a trait which affects their judgement and decision-making. Algorithms work with data and as such, have no such bias.  They are objective. In fact, as far as mistakes are concerned, the only ones a computer program can make are the ones a programmer has accidentally coded it to make (NB: it is essential to design a strategy and understand the market before undertaking any programming).

Furthermore, artificial intelligence saves space and wages! An engineer earns 5 times less than a trader... and a computer takes up less space than 50 traders! It is therefore pretty clear that artificial intelligence is hugely cost-saving and the banks are taking full advantage of this.


Apart from the job losses, of trader positions in trading rooms in particular, what are the repercussions of what appears to be a scheduled obsolescence of the trader?

Some consequences were easy to predict… It would appear that real estate prices are falling in major financial centres, such as London and New York, as traders and other fund managers put their properties on the market. Indeed, those astonishing salaries that enabled their owners to purchase property are no more. The real estate slump still needs to be analysed more carefully but it is easy to imagine this happening.

Another consequence is playing out on the global job market. The brightest students, who previously would have gone into finance in search of potentially huge salaries, will now be in jobs in many other sectors. If the banks can no longer offer the money these students are looking for, they will go look elsewhere. This is good news for other sectors, tech, health or energy, for example, that will now be able to bag these brilliant brains and talented people without having to promise them (and without being able to offer them) massive salaries.

What about the future?

So, what will be left of the traders in 5- or 10-years’ time? Will this job have disappeared? Are traders looking job-death in the face?

To answer these questions, we need to define what sort of trader we are talking about. If we take execution in its purest form, it is highly likely machines will be able to do the job completely with no human intervention.  Programs are faster, more reliable and more effective. People are, however, required to create and maintain these algorithms.

The future is less clear for jobs that require actual thinking, where opinions and a medium- long-term view of the markets comes into the decision making.  As far as speculation is concerned, trading robots dominate the very short term (high-frequency trading) but are far less present as the term lengthens.

It would seem that a trader’s survival technique must be to become a savvy portfolio manager with a long-term vision. He or she will also need to specialize and become a true expert offering added value.

However the future plays out, it is clear our youngsters who want to "work in a bank” would be better off getting a computer programming degree instead of going to business school or getting a master’s in finance!

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Last Update on 19/02/19

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