Two years ago, just before Michael Lewis released Flash Boys starting a sharp if brief revulsion against parasitic, predatory High Frequency Trading frontrunners, which delayed Virtu's IPO by one year, we broke down Virtu's 2013 net trading income by product line. We were not surprised to find that of the $45 million in total growth, the largest income category, US stocks growth was a tiny 5% of all, rising by $2.3 million in 2013. In fact, between EMEA, APAC and US Equities, there was very limited growth in 2013, while commodities posted an outright trading income decline. It appeared to be the case that growth in conventional products has indeed plateaued, as more and more HFT competitors rush in. And yet, one product stood out. It is highlighted on the chart below: FX.
This is how we summarized this observations almost exactly two years ago:
With increasingly more homo sapiens-type banker FX traders being laid off left and right for pervasive and ubiquitous manipulation of currencies (who can forget the infamous "Cartel" chat room, JPM's head of spot trading presiding), what this means is that more and more algos will rush into this product to fill the voids left by carbon-based traders.
Two years later, Bloomberg caught up to the fate of what it calls Wall Street's "dying breed", the once proud FX traders who over the past two years have become an endangered species between losing their jobs to Virtu's algos, and to countless FX rigging scandals which revealed that the world's biggest market was nothing but one grand conspiracy in which a handful of banks schemed illegally in so-called chat rooms.
First the numbers: there were 2,300 people working in currency-market front-office jobs at the world’s biggest banks in 2014, a 23 percent drop from four years earlier, according to Coalition Development Ltd., an analytics firm.
Bloomberg also discovers Virtu: "Humans are up against formidable opponents across the industry. Take Virtu Financial Inc. Deploying sophisticated technology in the business, the company’s computers can trade more than 11,000 securities and other products on more than 225 trading platforms in 35 countries. Because automation is so deeply ingrained in its business, it had only about 150 employees last year -- generating more than $5 million per worker."
And here are some of the people behind the numbers:
Charlie Stenger, a currency-broker-turned-recruiter, has seen it all. One fired trader wept in his office. Another admitted he hadn’t told his wife he was unemployed, and left the house every day in a suit to sneak off to a coffee shop. Then there are the delusional guys, who carefully explain how they’re not interested in jobs that don’t pay as well as those they just lost.
Stenger, who was laid off from ICAP Plc in 2013 and now works for Sheffield Haworth Ltd., tells the men and women he counsels: Take the pay cut. Oh, and don’t wait for the phone to ring.
“This is crunch time -- it’s not looking good,” Stenger said. “This is a shrinking pond.”
It is, and not just for the people: the size of the overall FX market itself is collapsing.
The death of the FX market has not been greatly exaggerated: the layoffs have continued and are unlikely to stop in the $5.3 trillion-a-day market. Revenue from from foreign-exchange divisions hasn’t bounced back after falling to $6.5 billion in 2014, down almost 45 percent from 2009, Coalition data show. Currency trading in the U.K. and North America shrank by more than 20 percent in October from a year earlier, according to central banks in those regions. London is the biggest center for foreign-exchange trading.
For some being replaced by an algo was not how they had envisioned the conclusion to their Wall Street careers:
“The business has to be downsized,” said Keith Underwood, a foreign-exchange consultant who ended a 25-year trading career, including at Lloyds Banking Group Plc, in 2014. But it’s not easy “for people who have been in a market for many, many years to see that they’ve been replaced by an algorithm.”
Others who have not been fired yet, and are just counting the days to that closed doors conference room meeting:
Some ex-traders have moved to smaller houses or pulled kids out of private school. Those waiting for the ax to fall hoard paychecks. Stenger was out of regular work for a year after he lost his job; he was told about the lay-off four days after he learned his wife was pregnant with their first child. “There were periods where I wouldn’t make money for 90 days at a time,” he said, “and the insurance bill was still due every month, and the rent and the car payments.”
For many, however, the feeling of escaping Wall Street's clutches is an unexpected one: liberation.
Underwood, the consultant, said he left the market because regulators were cracking down on his niche by implementing stricter derivatives rules after the financial crisis. “My style of trading went out of vogue,” he said. So the former head of foreign exchange trading for the Americas at Lloyds, who also led teams at Credit Agricole SA and Lehman Brothers in London and New York, reinvented himself.
“I couldn’t be more happy,” said Underwood, who described the hourly rates he charges as comparable to those of a senior lawyer. “There is more empowerment, with control of my future.”
Many traders have discovered they have transferable skills. Some have landed work as salespeople or executives at financial technology companies, payment providers or trading platforms and exchanges. Others are using their knowledge to bolster banks’ risk-management operations. Franz Gutwenger, a recruiter in New York, said one of his financial-institution clients has expanded its regulatory-compliance staffing by a factor of five.
“I don’t think there’s a whole lot from my generation that are still in the industry,” said Guy Piserchia, who during a three-decade career led North-American foreign-exchange trading at Bank of America Corp. and Paribas, a precursor to BNP Paribas SA, in Asia. He left Wall Street in 2012 to become mayor of the 8,700-person township of Long Hill, New Jersey. Now he’s deputy mayor, but said he wants to get back into the business in a role that combines his financial and government experience.
What happens next:
“With automation and electronic dealing, I think there are going to be fewer people” on foreign-exchange desks, Piserchia said. “The ones that have evolved and survived may be some of the better ones -- or, as in life, may be some of the lucky ones.”
As the realization that there is a life away from finance, more will leave the confines of Wall Street for ever. Who will remain: just the central bankers who pretend the market is the economy, and pretend there is such as thing as a "market" in the first place, and the algos which however without humans to frontrun, will soon be extinct soon as well.