One of the last human points of resistance to the algorithmic take-over of professional trading can be found in the fixed-income trading desk.
The deft relationship business is known for having participants with Ivy League pedigrees and a lacrosse playing background, a data point that a machine learning algorithm recently used when making hiring recommendations.
With an algorithmic transition, profit margins are being squeezed as human relationships are becoming less important. Benchmarking the transition are new hiring mandates at some of the largest banks, a recent Greenwich Associates report pointed out.
Relationships and fundamental market understanding are less important, the report noted, and algorithmic experience and data science skills are now in demand.
In this emerging environment, what are best practices for an integration framework?
When combining fundamental investment thinking with quantitative thinking unique conflicts often arise. Fundamental, discretionary fund managers often creatively connect non-correlated dots and sometimes challenge consensus thinking.
Quantitative logic, on the other hand, is often driven by if-then Boolean logic at its core and looks for mathematical consensus to guide decisions. Mixing these two disciplines can be like expecting oil and water to enjoy each other’s company.
“Relationships and balance sheet still matter, of course,” Greenwich Associates Managing Director Kevin McPartland wrote in a report title that highlights a dichotomy, “Trust and Data Drive Fixed-Income Dealer Growth.”
Trust is a human concept and data is often associated with empirical, mathematically discovered understanding is the point where a melding of the minds might occur.
The integration of the two highlights the new path forward. “But the ability to manage both in a more quantitatively driven way can mean the difference between profit growth and a year-on-year decline,” McPartland observed.
Technology is increasingly becoming an important feature on bond trading desks, particularly for sell-side banks. Fully 91% of bulge bracket banks said automating parts of the trading process was one of their “top technology priorities for 2018,” the Greenwich Associates report pointed out.
Only 44% of middle market participants, meanwhile, felt the same. This group was having slightly more difficulty “complying with new/changing regulations” and was more focused on improving client management tools and data.
Knowing what technology to integrate so as to deliver a near-term positive return on investment while positioning the firm for a longer-term shift in intelligent automation can prove challenging and, itself, might have variables that don’t easily fit into a math formula.
“Assessing the process of tech integration is always a challenge because no technology is perfect, but it is often much better than human performance,” said Evan Schnidman, CEO and Co-Founder, Prattle, a firm that uses machine learning techniques to analyze human speech patterns to provide a market edge.
“Electronic equities trading has proven to be highly reliable, but very rare missteps can have catastrophic cascading effects. With bond trading, and any other technology-driven process in financial services, it is vital to build appropriate circuit breakers and human checkpoints. Simply, technology is a valuable tool, but humans still need to be in the loop.”
When integrating technology into a bond trading workflow it is important to set proper expectations that can be measured on a project plan timeline.
Often times expecting the unexpected is a discretionary skill that requires understanding technology’s limits.
“The best practice in tech integration is to remember that technology will not solve all of your problems, but it may be able to streamline the human workflow and optimize decision making,” Schnidman said. “If institutions keep that in mind, they are likely to adopt technology more readily, thereby making each additional innovation less jarring from a tech integration standpoint.”
With technological change coming at an increasingly rapid pace, the imperative is in understand what aspects of human trading can be modeled and what should remain discretionary.
“Instead of fully relying on quantitative approach at the beginning, it is a good starting point to integrate the output of quants and AI models in the human decision making process of position taking and dealing,” said Tsuyoshi Yokokawa, founder and CEO of San Francisco based Alpaca Markets, a firm that in parts helps integrate quantitative trading models into fundamental trading methodologies.
As the last refuge of human-based trading turns algorithmic, the processes and methodologies that drive these projects are likely to determine success or failure to a large degree.
In bond trading, the sell side is taking a different approach to that of the middle market.
What Are Your Favorite Christmas Songs And How Much Money Do They Make?
Christmas is the gift that keeps on giving for a select group of singers, songwriters and producers. An article in Forbes pegged U.S’s Christmas Music as the “Global King” compared to other genres of music like Pop.
So how much money are they talking? CNBC’s Tom Chitty explains.
Top 10 Trending Things In Tech This Week
What up, #WealthGang, it’s Friday, and it’s oh-so sweet! As we wrap up the week, here are 10 of the biggest stories in tech this week.
1) Earlier this year, we covered how Uber’s Uber Eats was worth more than rival Lyft itself. Well, turns out they were right. According to reports, Uber is trying to sell its Indian operations to local rival Zomato.
And that deal would value Uber Eats’ business at…*drum roll* a whopping $400M! 👀
Millennials To Gen Z: 5 Ways They Differ In The Workplace
(Editor’s Note: The following article is a guest post by superstar entrepreneur and tech investor Jonathan Schultz.)
There has been plenty of focus on millennials in the past few years, but it’s now time to redirect our attention to Gen Z. Right now Gen Z is entering the workforce and are ready to become the face of corporate America.
While there are plenty of similarities between Gen Z and Millennials, let’s look at a few ways they differ.
Gen Z is more competitive
Millennials have been said to be collaborative and teamwork focused and want to operate in an environment where they feel included and part of something bigger. Gen Z is said to be more competitive and want to be judged based off of their individual performance.
Gen Z also understands that there is a need for consistent development in skills in order to compete. This generation will do whatever it takes but certainly wants to reap rewards for it.
Gen Z is highly idependent
Gen Z typically likes to work alone and many of them would rather have their own office space as opposed to working in open and collaborative environments. This generation also prefers to manage their own projects, so their unique skill sets can be exposed.
Gen Z does not want to depend on others to get things done.
Gen Z prefers face-to-face communication
Millennials love to communicate via email, text, and anything other than face-to-face. The Gen Z group are huge in-person interactors and prefer it over the less personal email or text.
Millennials have received a lot of “bad press” for being so attached to their phones and Gen Z wants to transition out of that shadow. This generation will want more in-person meetings to discuss projects, etc.
Gen Z knows technology
Gen Z has known nothing other than technology their entire lives. They grew up with Facebook, texting, etc. Millennials still grew up with landlines and dial-up internet.
While Millennials are tech-savvy, Gen Z has been living in a world of smartphones for as long as they can remember. This generations relationship to technology is almost instinctual rather than learned.
Gen Z expects the workplace to conform to their needs
Gen Z wants everything to be catered to their needs. This is why companies have had to re-think the amenities they offer and how they structure their offices in order to meet the needs of this young workforce.
Companies now have to appeal to this younger mindset and have a less cookie-cutter approach to the environment they create for their employees. While millennials also expect the workplace to conform to their needs, for Gen Z, it could mean the difference between accepting a job offer or not.
There are obviously very clear differences between these two generations. Yes, every member of a generation will have their own unique traits and characteristics, but overall you will see that Gen Z is a more independent and technologically-advanced group in comparison to Millennials.
Jonathan Schultz is an entrepreneur, real estate tech investor and influencer. He’s the co-founder of Onyx Equities, a leading private equity real estate firm, and has been voted one of the most powerful people in real estate. Follow Jon’s blog here.
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