I got a call yesterday from an old friend, a veteran trader who had worked on hedge funds and as a high-level stock strategist for many years before being laid off earlier this year.
He called to tell me that he had finally obtained a job, working as a strategist at a very respectable firm. I realized that he was one of about a dozen friends I knew had who had been fired from senior positions in the last year, and he was the only one who had gotten another job.
Call it The Great Paradox, or Wall Street’s Miserable Summer: even as the markets hit new highs and investor sentiment remains strong, Wall Street continues to lay off its own.
Among the ten leading global investment banks, head count for traders in fixed income, equities, and investment banking are down more than 20 percent from 2011 to 2016 and are declining again this year, according to Coalition, a business intelligence provider.
What’s behind this? Another year of record low volatility, low volume, oceans of money leaving active management for passive investing, and the growing use of artificial intelligence to pick stocks for even active managers means that sell-side traders and many hedge funds are suffering through another year of slow business.
In the old days, volume would pick up as stocks hit record highs time and again, but no more.
You can see the miserable state of the trading business in the results from companies like Virtu, one of the world’s largest market makers in stocks, bonds, commodities, and currencies. They reported earnings yesterday. CEO Doug Cifu summarized the state of the business: “With volatility measures globally at historic lows, challenging conditions for market makers persisted in the second quarter.”
That’s putting it mildly: total revenues were down 16.8 percent year-over-year. Trading income was down 18.2 percent.
How slow has it been? Here’s some excerpts from their report:
1) Why the markets seem so boring. The major indices crawl to new highs, but they aren’t moving much on an intraday basis. Realized intraday volatility for the S&P 500 was just 55 basis points in the second quarter. That means on any given day the S&P moved about a half-percent from its high to its low. That’s about 12 points. That’s 41 percent lower than it was last year.
2) Why traders are getting worried about their jobs. Low volatility means less trading. Average daily consolidated U.S. equity share volume declined 6 percent year-over-year.
3) The slowdown is happening everywhere, not just the U.S. In Europe, realized intraday volatility dropped 50 percent in the Euro Stoxx 50 Index; volume declined 13 percent. In Japan, realized intraday volatility of the Nikkei 225 index dropped 62 percent year-over-year; volume declined 9 percent.
4) It’s not just stocks, it’s happening in commodity and bond trading as well. the JP Morgan Commodity Volatility Index dropped 18 percent year-over-year, as did other measures of commodity volatility. The Deutsche Bank FX Volatility Index (CVIX), a measure of investors’ expectations of future currency volatility, declined 29 percent.
Traders are not just getting fired—they’re getting paid less. Pay is down 5 percent to 15 percent for equity sales traders just from 2015 to 2016, according to Johnson Associates.
Is it all over for a Wall Street career? Not necessarily – but forget about the traditional analyst and trading job. UBS says they are hiring psychologists, as well as experts from fields like pricing and shipping, to complement the firm’s research process. Others are hiring behavioral psychologists, social media consultants, and computer geeks who can write code to execute complicated algorithms.
“We’re hiring physicists, we’re not hiring Ivy League athletes,” Virtu’s Doug Cifu told me.