Sales and Trading

Many events, laws, and developments have affected the work of sales and trading professionals. Four of the most noteworthy are the transition from the open outcry system of trading to electronic trading, the Great Recession and its aftermath, the increasing representation of women in trading and in the financial sector as a whole, and the COVID-19 pandemic and its aftereffects.

From Open Outcry to Electronic Trading

Open outcry is the term that describes the method that traders and sales brokers formerly used to buy and sell stocks, futures contracts, and other financial instruments on a trading floor at a stock exchange or futures exchange. This system, which involved both visual (hand signals) and verbal communication (talking/shouting), was the primary method of communication in the financial sector for hundreds of years before the development of technology that allowed for indirect communication between buyers and sellers. The open outcry system made trading floors, which are also known as “pits,” loud, raucous places that in a way almost seemed like a sporting event to both participants and onlookers. “From the mid-19^th century to the early 21^st century, open outcry markets commenced trading on a large scale and became the backbone of the financial industry,” according to “Evolution Of The Marketplace: From Open Outcry To Electronic Trading,” an article published by Forex Capital Markets.

The 1960s marked the beginning of the transition from the open outcry system toward electronic trading. In the early 1960s, a digital stock quote delivery system was developed and launched that allowed traders and brokers to receive market data on demand instead of waiting for ticker tape to be printed. Over the next few decades, the following developments set the stage for the end of most open outcry trading in the United States and in most developed countries:

• 1971: The National Association of Securities Dealers Automated Quotations is launched, becoming the world’s first electronic stock market.
• 1976: The Designated Order Turnaround system is introduced in the New York Stock Exchange (NYSE), allowing the electronic trading of securities.
• 1984: The NYSE launches the SuperDOT trading system. According to Forex Capital Markets, the system “marked a quantum leap in equities trade execution in terms of both speed and volume.”
• 1993: The SuperDOT trading system is able to process trading volumes of one billion shares daily, with a standard response time from floor to firm of less than a minute.
• 1997: The Toronto Stock Exchange eliminates open outcry trading.
• 2000: The London International Financial Futures Exchange becomes the first major futures house to switch from open outcry trading to all-electronic trading.
• 2008: The Intercontinental Exchange eliminates open outcry trading.
• 2014: The New York Stock Exchange eliminates open outcry trading.
• 2015: The CME eliminates most open outcry trading.
• 2020: The COVID-19 pandemic prompts many of the remaining open outcry trading floors to temporarily close; the success of remote trading fuels a renewed discussion of closing the remaining open outcry floors.
• 2021: The CME eliminates its open outcry practice across all exchanges.
• 2022: CBOE opens a new trading floor in response to client demand for additional floor-based trading.

There has been much debate about the benefits and drawbacks of electronic trading. Proponents of electronic trading say that it provides greater liquidity, better market access, tighter bid/ask spreads, and lower commissions and fees. Opponents say that electronic trading causes more market volatility, allows traders and brokers to more easily manipulate markets, reduces transparency, and puts financial markets at greater risk due to failure of technology, cyberattacks, and other technology-based issues. Supporters of open-outcry trading believe that this format is better for larger, more complex orders and because it gives traders and their clients a more nuanced understanding of market trends because they are assessed by humans. “Trading floors represent a different way of doing things, not worse, not an inferior way… a different way of doing it—there’s value in that,” according to an interview in The TRADE with Daniel Labovitz, former head of regulatory policy at the New York Stock Exchange and current chief executive of GIX.

The Great Recession and Regulatory Revisions

In December 2007, the United States began to experience a severe financial crisis that many economists believe was the worst downturn since the Great Depression (October 29, 1929–late 1939). During the crisis, which become known as the Great Recession, the U.S. housing market crashed, many people who had taken out subprime mortgages lost their homes, and interbank credit markets dried up. These and other events caused the failure of many banks (including several major investment banks) and businesses. The federal government bailed out some financial institutions (such as mortgage giants Fannie Mae and Freddie Mac) that it deemed “too big to fail,” but allowed other banks (such as Lehman Brothers) to fail.

Although many factors caused the Great Recession, lawmakers began to focus on risky activities undertaken by the financial sector in the years leading up to the recession. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which increased regulation of the financial industry and offered improved protections to consumers. The Act required all investment management firms with more than $150 million in assets under management to register with the Securities and Exchange Commission, bank holding companies with more than $50 billion in assets to abide by stringent liquidity and capital standards, and financial institutions to take on higher levels of credit risk regarding the sale of asset-backed securities, among a variety of other rules. Additionally, the Volcker Rule, a provision of Dodd-Frank, restricted banks from conducting certain investment activities with their own funds and prohibited them from investing in or sponsoring venture capital, private equity, and hedge funds in most cases. In 2019, five federal financial regulatory agencies adopted a final rule to exclude community banks with less than $10 billion in assets and total trading assets and liabilities of 5 percent or less of total consolidated assets from the Volcker Rule. In 2020, these agencies revised the “covered funds” component of the Volcker Rule to allow banking entities to invest their own money in covered funds without limitation as long as they do not engage in proprietary trading and meet other requirements.

For years, investment banks had proprietary trading desks, which were major generators of profit. In proprietary trading, banks make short-term trades in the financial markets using their own capital. This method is more profitable, but much riskier, than trading with funds contributed by investors. Some economists believe that improper proprietary trading practices by banks and other financial firms contributed to the Great Recession. The implementation of the Volcker Rule, a part of Dodd–Frank that came into effect in July 2015, prohibited banks from conducting certain investment activities with their own funds (including proprietary trading) and prohibited them from investing in or sponsoring private equity or hedge funds. Recent changes to the Volcker Rule allow banking entities to invest their own money in covered funds without limitation, but they still cannot engage in proprietary trading.

As a result, many investment banks retreated from their trading activities (instead, focusing on more lucrative wealth management services). This prompted significant reductions in staffing. The number of traders, sales workers, investment bankers, research analysts, and other frontline producers employed at the top 12 investment banks in the world declined from 60,800 in 2009 to 48,900 in 2019, according to the London-based consulting firm Coalition Ltd. The largest declines were in equities trading.

During the Trump Administration (January 20, 2017–January 20, 2021), Congress and the administration reversed some of the provisions of Dodd-Frank and reduced regulation of the alternative funds industry. The tax reform bill passed by Congress in late 2017 left the carried interest tax provision intact (this provision fuels strong profits for fund managers).

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 changed the financial threshold in which banks could be classified as “systemically important financial institutions” from those that had more than $50 billion in assets to those with $250 billion in assets. Additionally, the act also provided smaller banks with relief from the Volcker Rule. (As of early 2024, federal regulators were strongly considering increasing requirements for banks’ capital and liquidity positions, but banks were resisting these potential changes.)

The Biden Administration has increased regulation of the alternative investment industry. In 2023, the SEC adopted amendments to Form PF (the confidential reporting form for certain SEC-registered investment advisers to private funds). The amendments require large hedge funds to file reports regarding the occurrence of reporting events that could indicate significant stress at a fund or investor harm. The SEC says that the “reporting events for large hedge fund advisers include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions.” It also says that the “amendments are designed to enhance the ability of the Financial Stability Oversight Council to assess systemic risk and to bolster the commission’s oversight of private fund advisers and its investor protection efforts.” In August 2023, the Securities and Exchange Commission also adopted new rules and rule amendments to the Investment Advisers Act of 1940 as a way to protect private fund investors and enhance the regulation of private fund advisers. The Alternative Investment Management Association, Managed Funds Association, and four other industry organizations filed a lawsuit against the SEC in response to these changes. More information on the new rules and rule amendments can be obtained at https://www.sec.gov/news/press-release/2023-155.

The short-term trend is toward increased regulation of the banking and alternative investment sectors, but keep in mind that regulatory winds shift based on which political party controls the White House and Congress, and regulation may change again in the future.

Don’t expect the number of traders, sales workers, researchers, and other investment banking workers to increase even if a future presidential administration seeks to reverse more provisions of Dodd-Frank. The growing use of automated trading and artificial intelligence–powered trading platforms will continue to significantly reduce the number of sales and trading professionals in the financial industry in coming years. “As it boosts productivity and lowers costs for banks and financial service firms, artificial intelligence will also threaten financial service jobs—about 15 percent of which are at risk,” according to Greenwich Associates, a global provider of market intelligence and advisory services to the financial services industry.

Women Traders Slowly Break the Glass Ceiling

Traditionally, the investment banking industry has been dominated by men, especially in front-line deal-making and advisory positions, managerial- and board-level positions, and in trading positions. Women make up only 12 to 15 percent of those in trading roles, according to studies conducted by executive search firm Sheffield Haworth. This is much lower than the percentage of women (about 47 percent) in the U.S. workforce.

Although the percentage of female traders remains low, informal surveys show that progress is being made due to growing shareholder calls for disclosures on workforce diversity, increased attention on workplace harassment as a result of the #MeToo movement, and initiatives by investment banks, hedge funds, and other employers to increase diversity in the field. Here are some noteworthy efforts being made by employers to improve gender and racial diversity among traders and other positions in the financial industry:

• In 2018, Bank of America and Citigroup released information on employee diversity and gender gap pay for the first time.
• JP Morgan Chase launched the Winning Women program (https://careers.jpmorgan.com/global/en/students/programs/winning-women-ba?search=&tags=location__Americas__UnitedStatesofAmerica) to help female students and young professionals learn about the company’s divisions, including Asset Management, Investment Banking, Risk Management, and Quantitative.
• Goldman Sachs launched a Trader Academy (https://www.goldmansachs.com/careers/students/programs/emea/womens-trader-academy.html) in London, where participants will “discover the extensive range of career opportunities within financial markets and trading, gain valuable insights and tangible skills into key areas of trading, work closely with a group of peers to grow [their] technical and soft skills through interactive workshops, and network with Goldman Sachs professionals and hear more about their experiences and diverse backgrounds.”
• Goldman Sachs created a MBA Diversity Symposium (www.goldmansachs.com/careers/students/programs/americas/mba-diversity-symposium.html) for students who identify as Black, Hispanic/Latinx, Native American, or women. The program offers participants with an opportunity hear from a diverse set of senior leaders as they share their journey from MBA to Goldman Sachs, learn about summer associate opportunities, and talk with recruiters and workers in asset management, global investment research, investment banking, and private wealth management.

Achieving gender parity in the trading profession is not just fair, it’s also beneficial to companies. Trading simulations run by the startup TradingHub and administered to interns found that women traders took fewer risks, made fewer trades, and were half as likely to break rules as male traders were. “In all, having more women on a team could translate into savings on brokerage fees, loss provisions, and fines,” according to an article about the simulations at CNBC.com.

The COVID-19 Pandemic and Its Aftereffects

In late 2019, the coronavirus COVID-19 was detected in China and quickly spread to nearly every country around the world, causing tens of millions of infections, more than seven million deaths, and massive business closures and job losses. In the short-term, the COVID-19 pandemic negatively affected the health of individuals; employment opportunities at businesses, nonprofits, and government agencies; and daily life. The pandemic also affected job-seekers and employees. Some investment banks, hedge funds, brokerage firms, commercial banks, insurance companies, asset management firms, mutual fund companies, and other employers of sales and trading professionals cancelled or delayed internships and other experiential learning opportunities, while others converted them to an online format. Onboarding of new hires was either delayed or moved to an online format by many companies. Most employers stopped conducting in-person interviews and, instead, conducted them via telephone and online, and many closed trading floors and offices and required their employees to work at home some or all of the time. Home-based work settings created a variety of challenges for sales workers and traders. Sales professionals were unable to meet in-person with current and potential clients, and they were forced to make most of their pitches by telephone and video chat. Traders that were used to using four to eight information screens in their offices were forced to get by with only one to three screens. Some traders had their workstations installed at home to increase productivity and access to information.

As the pandemic progressed, some financial firms began to re-open their offices with limited capacity and staggered work days/weeks. Some trading floors that used open-outcry also re-opened, although traders at some floors were required to sign waivers accepting responsibility if they became sick while on the job.

One of the long-term effects of the pandemic will be increasing expenditures on technology due to the need for sales professionals and traders to work from home, the need for enhanced cybersecurity measures, and other factors. “The transition to remote working highlighted a need for greater digital enablement through the toolkits firms provide to the workforce, both in hardware and software terms (e.g., virtual turrets, digitized workflows, collaboration tools, etc.),” according to the professional services firm EY. “The manual processes that remain prevalent across the investment bank were particularly challenging to execute and monitor remotely [during the pandemic]… Firms that address deficiencies in bandwidth, cyber, and surge capacity that the crisis exposed will create lasting competitive advantages due to IT flexibility, distributed capabilities, and security.”