Robots Are No Match for the Human Bond Trader

 Sep 15, 2017 4:30 AM - by Marcus Ashworth & Lionel Laurent

If there's one crowded trade in the finance industry, it's predicting the automation of bank jobs.

The former head of Citigroup Inc., Vikram Pandit, reckons three out of 10 bank staff will be replaced by a machine. Deutsche Bank AG's CEO John Cryan, meanwhile, has called for a "revolutionary spirit" among his troops as computers replace a "big number" of people. In an industry still hampered by weak profit a decade after the financial crisis, you can see why executives are seduced by the idea of using automation to become more efficient and productive.

The Man-Machine

Front-office headcount at the top investment banks tracked by research firm Coalition: 

  • 2012: 65,400
  • 2013: 59,500
  • 2014: 56,700
  • 2015: 55,700
  • 2016: 53,300
  • 2017: 52,600

But there are limits for robots in finance.

Bond markets, for example, have been relatively resistant to the technology onslaught, even as electronic platforms eat up market share at the less sophisticated end of things. Unlike stocks, which are fairly homogenized and easy to trade, bonds come in many different shapes and sizes.

General Electric Co. has one stock listing yet more than 6,200 different bonds issued under a raft of related entities with different end dates, coupons and other features. And that's before you get to over-the-counter derivatives, which can be created in infinite ways.

Surveys by Greenwich Associates, a research firm, show that fear of the machines is actually fading in fixed income. Whereas 46 percent of bond dealers saw electronic trading as a threat to their business in 2015, that has dropped by more than half. 

That might be because some big banks are automating heavily themselves. But it might also be because the more money that's at stake, the more human interactions count. Trader relationships bring market color, liquidity for hard-to-trade blocks and distribution channels for future issuance. No robot has been invented yet that can truly understand the finesse of price discovery needed by traders.

Betting On People And Tech

The share prices of people-heavy broker ICAP and fintech NEX have both outperformed

As old-school as it sounds to imagine humans toiling away in the brokerage industry, it's happening and will continue to happen for a long time. Last year's merger between two behemoths of voice-broking, ICAP Plc and Tullett Prebon, is a case in point. The deal resulted in two companies with very different equity stories: NEX Group Plc, an electronic platform play on the future of fintech, and TP ICAP Plc, a straightforward people-heavy broker with an opportunity to strip out back-office costs.

Both stocks are up 31 and 37 percent over the past year, and both stories make sense. TP ICAP's voice broker headcount was 2,842, according to its last filing, yet it delivered both revenue and profit growth. There's a market for humans, even if machines are snapping at their heels.

The finance industry has shrunk over the past decade, a rational response to where regulators set the bar post-Lehman Brothers. But executives should be careful not to get too wrapped up in their high-tech efficiency dreams. They may just be missing out on an abundant, flexible, adaptable computer that can be paid variable rates in return for necessary work: the human being.