Sales and Trading

There have been many events, laws, and developments that have affected the work of sales and trading professionals. Three of the most noteworthy are the transition from the open outcry system of trading to electronic trading, the Great Recession and its aftermath, and the increasing representation of women in trading and in the financial sector as a whole.

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 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.

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.

The Great Recession and Regulatory Roulette

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.

In recent years, the government has eliminated some Dodd-Frank provisions and reduced regulation of the investment banking, hedge fund, private equity, and other financial sectors, and further regulation changes are under consideration. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 changed the financial threshold in which banks could be classified as “systematically important financial institutions” from those that had more than $50 billion in assets to those with $250 billion in assets. Additionally, the act also provides smaller banks with relief from the Volcker Rule.

“While banks will likely welcome the changes, the revamp isn’t expected to trigger a return of proprietary trading or prompt lenders to rehire some of the high-flying investors who fled for hedge funds after the financial crisis,” according to Fortune. “A full repeal of Volcker is seen as improbable, because it would require an act of Congress.”

The short-term trend is toward deregulation 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 increase again in the future. Seventy-three percent of hedge fund and private equity executives surveyed by the fintech company Koger believe that a new presidential administration would likely strengthen financial regulations.

Don’t expect the number of traders, sales workers, researchers, and other investment banking workers to increase even if Dodd-Frank continues to be dismantled. 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 Sales, Trading, and Research.
• Goldman Sachs launched a Trader Academy (https://www.goldmansachs.com/careers/students/programs/emea/womens-trader-academy.html) in London, “where participants learn about the role of a trader through interactive business spotlight sessions, work shadowing and networking. The aim of the program is to prepare women for future roles in trading.”
• Credit Suisse created a Women’s Mentor Program (https://www.credit-suisse.com/careers) for outstanding female college sophomores who want to learn about its various divisions and internship opportunities. Interested parties can apply for one of the following subprograms: Global Markets Program (including sales and trading and equity research), Investment Banking and Capital Markets Program, and Technology Program. It also offers the Sophomore Diversity Program for talented college sophomores from traditionally underrepresented backgrounds (Black/African American, Hispanic/Latino, and/or Native American descent).
• Goldman Sachs created a Women’s Possibilities Summit (https://www.goldmansachs.com/careers/students/programs/americas/womens-possibilities-summit.html) for undergraduate college freshmen and sophomore women. To provide an “introduction to the financial world through hands on experience, key insights into the Goldman Sachs culture, and networking opportunities with professionals at the firm.” Other diversity programs are available.

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.