The Wall Street Journal reports Machines Took Over the Stock Market. Next Up, Bonds.
Will machines take over the bond market too?
Banks including Credit Suisse Group, Goldman Sachs Group, and Morgan Stanley are all making bets in that direction, unleashing new trading software systems in recent months to pick up share in the $6 trillion market for investment-grade corporate debt.
A recent study by the Bank for International Settlements estimated that only 40% of investment-grade corporate bond trading was executed through computers rather than over the phone, compared with 75% in Treasury-debt trading, 80% in stocks and 90% in a broad array of futures contracts.
Now, investment banks are pushing to stoke more electronic trading in the market, especially with small trades that otherwise might fall through the cracks. It is yet another example of banks turning to technology to try to generate revenue growth at relatively low cost.
Starting with smaller trades, those under $1 million, is a safer route for the banks because it doesn’t threaten the profit margins on the big trades they do with institutions.
Some past efforts to change the patterns of bond trading have met resistance or petered out. Platforms offered several years ago by Wall Street players including Goldman and money manager BlackRock Inc. were shelved or integrated into other efforts.
But more recent initiatives, such as networks connecting bond investors to trade with each other, have started to show traction.
Credit Suisse launched its system, called CSLiveEx, earlier this year, making the decision to fully automate the smallest trades in the U.S. market for bonds of corporations with top credit. That means the trades have no direct human involvement.
Before launching CSLiveEx, Credit Suisse responded to fewer than 10% of clients’ electronic trade requests for the smallest investment-grade corporate bond trades. Now the bank says it is responding to virtually all of those inquiries and executing trades twice as often as it did before.
“Banks are giving the algorithms a lot of at-bats,” said Michael Sobel, president of TruMid Financial LLC, an electronic bond trading network. “I fully expect that the folks who are successful will keep dialing up the sizes.”
No Human Involvement
Why involve humans? They tend to do things like panic. If we can just get rid of flash crashes we can keep bonds on the same path as stocks.
Enter the Permanently Rising Plateau
The market has reached a permanently rising plateau.$DJIA pic.twitter.com/XyecNd5z5x
— Charlie Bilello (@charliebilello) October 18, 2017
If we can just get rid of this Mish guy, all will be right with the world.
Mike “Mish” Shedlock
@Ambrose_Bierce — there is absolutely nothing rational about having a clueless academic (with zero real world experience) manipulate interest rates for political advantage
Not sure if this bothers people because computer algorithms can lead price discovery around by the nose, or because putting massive volume of shadow securities like ETFs, in an illiquid market just seems wrong. They count oil reserves don’t they? I imagine they will someday count gold reserves still in the ground. and we count future earnings, or what’s a stock certificate? And if the government is adding bonds faster than economic activity suggests, that implies future asset inflation, which is why markets are so rational. (even though printing bonds wily nily is not) Once you assign the label rational to a market, then a computer is qualified to operate in the system, and as long as any pullbacks are rational the system continues to function.
I’m sorry, but “rising plateau” is an oxymoron.
Following the initial complaints about RSS (now fixed except for Netvibes and Netvibes is not just the Maven) and initial complaints about order of posts (fixed for mobile and mostly fixed for the desktop) emails have been at least 50% favorable. More improvements are slated.
I guess computers will never panic-sell a losing issue so stocks will never fall again. Machines will hold on to stocks years after companies stop making money and begin losing it. What could go wrong?
“Why involve humans? They tend to do things like panic.”
First posts ever after 5 years because I’m just that frustrated with the new format.
Please get us off this site.
Bloomberg had another one of their clueless media weenies write an article on this trend… suggesting that AI “robots” were going to replace many (bbrg suggested eventually all) humans on Wall Street. Of course, humans use their Bloomberg terminals — robots do not. Bbrg terminals are what pays for the money losing media division. More AI robots on trading floors also means much lower subsidies from Bloomberg’s terminal business getting used to finance the perpetual drain that is their media arm. Since Mike Bloomberg’s political career is just about over, the media division arguably served its purpose already.
Now for extra credit, someone should ask how the city of New York and state of New York will avoid bankruptcy, given that Wall Street provides (directly and indirectly) the majority of the city’s revenue (and by extension, a majority of NY state’s revenue)?
At most banks, including the “big guys” and middle market players, the volume of corporate debt traded (by any means – human or computer) does not justify current staffing levels. It doesn’t justify even half the current staffing levels. The banks are substituting capital (computerized trading) for human labor because they have to. Banks already slashed commission schedules paid to human sales/trading, they already encouraged cross product selling (having corporate bond sales sell other products and allocate some staffing costs to those other products). But the banks aren’t adding any value — no true research, no capital / balance sheet, and price discovery under Bernanke/Yellen has become a bad joke. Banks ultimately will collect a percentage of the value they add. The fact remains that Jamie Dimon and Lloyd Blankfien and all the other $15 million paycheck collectors haven’t innovated a single thing in 20+ years. Its the same stalled business model. The problem isn’t isolated to just corporate bonds, its the whole stagnant business model