IBM: Algos to Replace City Traders

LONDON-Nine out of 10 traders in the City of London will be out of a job in 2015, mainly because of the rise of algorithmic trading. That is according to an IBM white paper released last week. However, securities firms' officials and analysts doubt the numbers.

IBM cites predictions from Goldman Sachs and the Tabb Group in its white paper. According to Goldman Sachs, "within 12 months, 60 percent of the deals struck on the London market will be generated from black box systems." In addition, the Tabb Group estimates that 80 percent of the total order flow from buy-side firms will be routed electronically.

While some securities firms acknowledge the upcoming changes, the dramatic predictions are not shared.

"There is going to be a reduction in the number of traders," says Maria Netley, a director in the Advanced Execution Services (AES) sales team at Credit Suisse. AES encompasses Credit Suisse's algorithmic trading activities. "We won't need as many traders as we do today, but [algorithms] will still need traders to operate them," Netley says.

Netley says that she does not rule out that traders could disappear from some banks and brokerage firms. "Some investment firms could offer a complete suite of electronic services," she says. However, "my gut feeling it that this number 'nine out of 10' is wrong."

"It's a bit over dramatized," says Octavio Marenzi, CEO and founder of Celent. "I believe algorithmic trading will change the nature of the trader's job and the type of people who will be hired."

Marenzi says that a trader's job will be to create new algorithms. "Traders will test them, come up with new strategies and algorithms, analyze their performance, see if it is working or not, and how they can improve it," Marenzi says. "The trader will not be someone that stays on the phone all day. He or she will be more tech-savvy."

Marenzi likens the rise of algorithmic trading to IBM's development of Deep Blue to compete against chess players. "IBM, at the time, said there was no need for chess players anymore, but behind the scene there were several hundred engineers to develop Deep Blue," Marenzi says.

"Algorithmic trading will have a slight impact on the number of traders, but it won't be dramatic," Marenzi says.