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“My algo-reliant junior colleagues are going to be burned alive”

Traders equity market crash 2018

I’ve been here before. I was here in 2008. I was here in 2001. I’ve worked on both the buy-side and the sell-side for two decades. Markets like these come around.

When I look around me though, I’m the exception. Most of my former colleagues have moved on; a lot of them took the money they made in finance and invested it elsewhere. I’ve survived because I’m good at trading and because I enjoy it, but the people I work with are mostly younger and cheaper than I am. They’re also lacking in mentors and in experience.

This matters. Under MiFID II, execution has already become a lot more important and as markets puke it will become more important still. However, too many of today’s inexperienced traders are just administrators: they’re used to putting an order into an algorithm and to reviewing its performance at the end of the day. When something goes wrong, they always blame the algo: the algo is everything.

Almost every trader in today’s market needs to use algos. But the best traders aren’t the ones just flicking a switch. The best traders really understand how each algo works. They understand that algos are tools and that they are the workmen: they are in control. They choose when to implement the algo; when to turn it on, when to turn it off, how to use it to maximum effect – This is what makes a good trader today.

Having a detailed understanding of the algos you work with will be key to thriving in the current market. The most experienced and most successful traders are those who can move nimbly between a full suite of algos rather than relying on a set implementation using the same process for every order irrespective of market conditions.  The old-school traders are best at doing this. We are more attuned to the risk associated with each trade, and we better understand the effects of market news and macro data.

When you’ve done this job for decades you learn to read the signs; to spot the stocks that are the exceptions. You know how to evaluate the market using both technical and fundamental analysis to form enhanced decisions. And you know how to react – when to pause by using limits, when to reduce and increase timing by using the algorithms. You’re not just sitting there in fast moving and volatile markets trying to get the algorithms to do all the work for you. Too many young traders are doing just that. They’re in for horrible a roasting in markets like these.

Raja Consul is the pseudonym of a senior algo trader at a U.S. investment bank

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Comments (1)

  1. In buy side what you said may be true. But in sell side, algo team is not doing well. There are two parts of algo team, execution and market making. Algo execution is highly commoditized, super competitive with surging technology cost. Future winner of bank algo execution will be the best cost cutter. Ironically, evolvement of technology actually make lots of front office algo execution headcount redundant given lots of analytics have been automated thanks to AI. Another case will be automated market making. Bank management said they want team to take more risk while they also ask risk team to put stricter risk limit. Banks are afraid of risk. However, in order to earn same amount of money like good old days, automated market making team need to take more risk, which also bring down return on capital, and bank management don’t like that. Finally you have combination, which the goal is to use bank’s capital to facilitate to increase client execution volume. But what you didn’t expect is customers have little loyalty nowadays and always take advantage from you. Buy side traders now have a lot of vendors teach them how to do that.

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