You wouldn’t want to be a portfolio trader now. So far, the portfolio traders (also known as program traders) who trade whole baskets of stocks have emerged unscathed from changes to market structure, but their days are surely numbered.
In the decade that I’ve worked in electronic trading, I’ve seen equities sales and trading teams change beyond all recognition as electronic trading systems and algorithms took over. Program traders, however, were able to avoid the tumult; if anything they benefited as big block trades remained an important area of differentiation.
This is changing. As trading becomes more and more cutthroat, program traders are being squeezed on both sides – both by electronic trading teams and by the remaining human cash traders and sales traders who haven’t traditionally been in the program space. Electronic trading teams have taken control of transaction cost analysis (TCA), market structure and good execution – all crucial in the MiFID II world. Meanwhile, sales traders have taken over the easiest high touch trades, pushing cash traders to find new things to do. Deprived of of their traditional function, cash traders are now moving into program traders’ space – trying to work on more complex big trades, whilst also providing trade ideas.
At the same time, the role of the program trader has become harder. Clients are more demanding but resources are more limited and margins are falling. It’s tough to keep clients as a portfolio trader now – a lot of brokers want to keep their risk business to a minimum or to save it for key clients and marginalized clients aren’t pleased with this. There’s less bespoke work and more attempts to shoehorn clients’ requirements into “one size fits all” offerings, but these can be problematic. Baskets designed to be all things to all clients can be difficult to trade if they include challenging names, and this can negatively impact the basket overall.
Most importantly, brokers have invested heavily in portfolio trading algorithms for years but it’s only now that these algorithms are really taking off. It’s becoming apparent that traditional portfolio traders are being replaced by quant and IT staff. The algorithms require tweaking and customizing per client and it can take time to find the optimal settings. This takes time, and brokers are finding it necessary to invest to reduce human intervention and error – something which is also reducing budgets for portfolio traders themselves.
Clients are also changing. The portfolio trading business traditionally had long only asset managers as its clients. Now, however, it mostly gets work from quant funds. These quant fund clients are usually “owned” by the electronic trading teams, but will work with portfolio traders on big block trades. The electronic traders don’t like this, and it often ruffles feathers. It’s causing a kind of rivalry between portfolio traders and electronic traders which is similar to the old rivalry between cash sales traders and electronic traders – and that didn’t end well.
This story isn’t over. It seems inevitable that electronic trading teams and portfolio trading teams will be integrated and that the electronic traders will come out on top. The survivors in the new world will be the quants of portfolio trading and the market structure specialists of electronic trading. The traditional portfolio trader will all but disappear. It’s only a matter of time.
Aaqil Jalali is the pseudonym of an electronic trader who’s worked for major U.S. banks in London.