
Goldman Sachs automated trading replaces 600 traders with 200 engineers - mgiannopoulos
https://www.technologyreview.com/s/603431/as-goldman-embraces-automation-even-the-masters-of-the-universe-are-threatened/
======
tomelders
A agency that I once worked for was asked to create a presentation of the
future of trading for a well known trading platform. It was the typical fluff
around voice interfaces, augmented reality, VR and all that drivel. But we all
knew what the future really meant - taking people out of the equation - but we
also knew that the people paying for the presentation didn't want to hear
that.

When people talk about the risk of automation stealing jobs, they tend to
think it's the low skilled jobs that are most at risk. But of your job is to
look at data and make descisions based on that data, you're gonna be the first
to go. And the more money pinned to your work, the quicker you will be
replaced.

~~~
burkaman
Isn't this type of trading sort of unique in how easy it is to consume the
data? Even in other investing areas, people who just "look at data and make
decisions" cannot be easily replaced until computers can read and understand
natural language and understand the state of the world. I can't immediately
think of anything else this type of automation could apply to.

~~~
teachrdan
Another obvious example is actuaries and any number of other analysts in the
insurance industry. According to Google[1], actuaries earn an average of just
over $97k/year. While this may not strictly be an "investing area," it's a
clear target for automation.

1\.
[https://www.google.com/search?q=actuaries](https://www.google.com/search?q=actuaries)

~~~
eru
Actuaries have quite a high regulatory wall protecting them from other human
competitors. But probably not from computers.

(I don't know about the legalities, but the laws requiring companies to have a
actuary sign off on stuff probably can be satisfied by having on part time
actuary shared between multiple companies sign off on computer generated
analysis.)

~~~
go_prodev
I know in banking, regulators are satisfied with ML models making decisions
about bank capitalisation, so long as the models are annually audited by an
external auditor (eg. KPMG, EY)

------
cm2187
A lot of dope smoking in this article.

There are a handful of markets that are large and liquid enough to fully move
to electronic trading, like spot FX, vanilla interest rate swaps, perhaps
treasuries trading.

But most other markets are very much relationship driven. For instance a
trader will make a market on illiquid bonds based on what he thinks is the
appetite from the short list of potential buyers, and that's based on sales
people and brokers discussing with these investors and feeding him with
feedback.

Very similar for mergers and acquisition which is mentioned in the article.
It's probably something like 1/3 relationship and advisory to the client, 1/3
going through legal and regulatory issues, 1/3 working out financials, which
are often based on unique and complex accounting standards, market specific
idiosyncrasies, etc. Good luck training an AI algorithm to do that. And with
what data?

There is massive room for improvement in the financial industry. But most
likely in the more boring areas of operations and settlement (cash settlements
for instance are massively labor intensive as there are always incidents,
system issues, accounts details changing, etc).

My personal experience of corporate IT in a large international bank is that
there is a handful of good people but an enormous army of average to well
below average people who do not know the difference between cash and capital
other than it starts with a c, i.e. are completely uninterested by the domain
they work on, and aren't good technically either. And these will ensure that
outside of a few players (including probably goldman), we are guaranteed that
automation is far far away no matter how much money we throw at it...

~~~
appleiigs
Your comment is spot on. The work Goldman Sachs does is relationship driven.
As a corporate client of GS, I don't need data. I need advice.

Don't confuse the work that investment banks do with the work that NASDAQ does
or with high-frequency trading.

In addition, the reason why GS has less traders and more developers is more to
do with government regulations preventing GS from doing certain types of
trading. Not because developers or AI is better. Dumb article.

~~~
rl3
> _As a corporate client of GS, I don 't need data. I need advice._

Such as: "Buy these sub-prime assets that we've bundled into CDOs. By the way,
we're actively betting against you and stand to make a ton of money when they
tank."

~~~
qeternity
Banks are huge, with different divisions. People who spout these types of
lines don't actually understand how it works. Plus, there is the whole due
diligence aspect. You can't blame anyone else. Also anytime anyone sells you
something, they are telling you they think it's worth less than you do. Yet
everyone is fine with that in every other industry.

Source: hedge fund trader who fights banks all the time, but doesn't agree
with their scapegoating.

~~~
cm2187
The Viniar explanation is actually quite good (not the "unfortunate to have on
email" bit, the 20cent in the dollar bit):

[https://www.youtube.com/watch?v=ccjZEvBGOuk](https://www.youtube.com/watch?v=ccjZEvBGOuk)

And to be fair to GS (not that it is the widow and the orphan), the "shitty
deal" wasn't a reference to the collateral of the CDO, but to the fact that
they didn't manage to sell a position on that transaction.

------
chollida1
....where the time frame involved is 17 years from 2000 until now.

It's also weird that they don't mention the about to be dismantled Dodd-Frank
Act (Volker Rule) that forced most sell side firms out of prop trading.

I guess the headline, "computers replace humans for the most mundane and rules
based tasks" doesn't grab headlines as much:)

One other interesting tidbit

> Some 9,000 people, about one-third of Goldman’s staff, are computer
> engineers.

Goldman has always had a larger focus on tech than most other sell side firms,
and that says alot given how much they all put into their technology, but a
full 1/3 of all employee's sends a very strong signal of how much they value
their tech.

Interestingly, it might have been those traders that slowed the progress of
the firm in the early 2000's. You can argue, and I've talked to former GS
people who made this argument to me, that having the existing traders really
slowed down GS in the march towards high speed trading. Michael Lewis's also
makes this point in his Flash boys book.

And not to put too fine of a point on it, but replacing a trader making
$1,000,000 a year because he has a direct PnL with a 1/3 of an engineer making
1/2 of that, because the algo has the Pnl not the trader, is a big win for the
bonus pool available to management:)

~~~
SilasX
>>Some 9,000 people, about one-third of Goldman’s staff, are computer
engineers.

Is that right, or is that just a confused journalist? _Computer_ engineers? As
in, hardware design so they can shave off nanoseconds here and there? Or do
they just mean programmers of any kind here?

~~~
dx034
Probably right, just poorly worded. It's not just engineers, it's all staff in
tech. Most of them will have a CS degree (or similar). Nearly none of them
will develop trading algorithms. It's mostly about maintaining systems, fixing
problems, updating regulatory changes, integrating third party data, etc.

Having a third of headcount in tech is not unusual for a bank nowadays.

------
brilliantcode
I'm super skeptical of these type of automated trading outfits. There's no
edge in them. All you've done is take a shoddy system done by hand into code.
At the end of the day, they still crap out when the market conditions it was
designed for shifts or naive view of the markets as something as a math
formula.

Exceptions are HFT, arbitrages where you don't need to speculate and take the
corresponding risks.

~~~
rb808
From the article > employed 600 traders, buying and selling stock on the
orders of the investment bank’s large clients.

The traders sound fancy but werent much more than call center staff, receiving
orders by telephone and writing paper tickets. They weren't prop traders.

------
qwrusz
I realize the irony of this comment: But Marty Chavez is one of the few openly
gay, latino Wall St. execs. Great, diversity, progress... This wasn't
mentioned in the article and to be honest, that is rare and it was cool to
read on article focused on Marty's skills as a professional banker (a good
one) without feeling the need to bring up his personal life.

------
anigbrowl
I bet almost none of those 200 engineers negotiated half as good a deal for
themselves as any of the 600 traders.

~~~
dx034
Traders who just forwarded phone orders didn't make that much. The bank only
gets the commission, there's not much the trader can do to increase profits.
The huge bonuses are/were in prop trading, not in executing client trades.

~~~
anigbrowl
All true, but I've never met a securities trader who wasn't ambitious, and
ones that aren't don't tend to get hired. I'm still betting on the suspender
brigade over the pocket protectors.

------
grondilu
What about other instruments? I used to work as an IT in a small investment
bank, and the traders there were not doing any equity trading. They were
dealing with bonds, swaps and stuff, and they were mostly doing arbitrage,
IIRC. Also there was one guy on forex, but I vaguely remember that he was not
supposed to speculate, rather he was supposed to trade whatever was necessary
for the other guys to work.

Is the equity market really that significant that we seem to only talk about
it?

~~~
dx034
> Is the equity market really that significant that we seem to only talk about
> it?

No, but most people only really understand equity markets. Few people know
what it means to trade a swap or even bonds. But as most people have some
experience with equities, it's easier to write about that. You won't find much
automation in other areas, OTC trading can't be easily replaced by machines.

~~~
monkeydust
As I said above, for Cash fixed income (bonds) it's happening today, it's
trending up for sure. Technology exists for liquid swaps also, that will be
next.

------
freddyc
Want to know how I know AI is over-hyped? All of the VCs who were bullish on
Bitcoin a few years back are now "thought leaders" on AI.

~~~
ionwake
You sound wrong.

Reread your comment and look at the price of bitcoin. Perhaps your inference
is upside down.

~~~
dx034
The price is high, but bitcoin is still not a reliable currency that could
present an alternative to established currencies. It seems to be mainly used
for speculation and illegal activities.

There are probably not more people using it to pay for real-world goods than
2-3 years ago. The bullish view was that bitcoin would be popular with the
public at some point. That hasn't happened yet.

------
monkeydust
From someone who has worked in OTC technology trading for 10 years:-

\- A lot of cash fixed income trading is open to automation, in fact it amazes
me when I watch some execution traders in action. Their process is highly
predictable: Get order into their execution blotter, send out RFQ to brokers,
get back prices, check best price against a known value e.g. limit price,
trade/no-trade.

\- This holds true for perhaps 80% of flow for a wealth/retail fund which
trade mostly liquid bonds under 1MM. For real-money and hedge funds that ratio
is perhaps <50% but still significant.

\- AI is not the biggest driver of automation here but rather the openness of
systems. By this I mean order management systems can interface to execution
management systems that can interface to venues. FIX/FpML have helped this
happen.

\- I see this as augmentation for the trader rather than replacing him/her.
Its a brand new colleague that can do the 'boring' work so they can go hunting
for liquidity!

------
RangerScience
So... if 600 traders were replaced with 200 engineers, do the engineers make
2-3x the salary of the replaced traders?

~~~
FT_intern
No, engineers are not paid well at Goldman

~~~
RangerScience
So... There was another post up not to long ago about a programmer's union.
The comments critiqued the need for it, but were talking generally.

Is there an opportunity for a financial programmer's union, so that the value
those engineers bring is better shared with the people bringing them?

------
drallison
No one seems to grok the real question here: "Why does Goldman Sachs automated
trading still need 200 engineers?". What are those engineers doing? And why
will they still be needed in 5, 10, or 20 years? Where are goals created and
trading decisions made? How are automated trading systems going to evolve?
Once working, will automated trading systems need regular replacement and
upgrades to protect them from bit rot?

------
mtillman
Most of the automation infrastructure (allocations, counter-party APIs, etc)
for this change started in the early 2000's. For example, the initial
allocation network was in place by 2003. Other firms who prefer to remain
unknown (don't need engineering recruiting PR) were nearly a decade ahead of
GS. RGM, Vertu, others. Let me know if you want to work on this type of thing.
Happy to help.

------
fredgrott
My question is are the jobs disrupted really stolen..

according to Mr Klarman(see the NYTime article) this automation trends lead to
more inefficiency in markets not less and thus give opportunities to some
traders to bet long term in the other direction..

Or are those disrupted jobs just getting re-deployed as new trading businesses
betting on some long term stuff..

~~~
pbk1
Klarman said Trump's protectionist stance against automation and globalization
will lead to market inefficiencies.

He also said the increase in passive investment relying on the efficient
markets hypothesis (EMH) will eventually lead to mispricings and
inefficiencies that can be taken advantage of by active investors such as
himself.

Those two things have nothing to do with the automation of execution trading
and market-making. So he is not claiming that automating the execution trading
and market-making done by banks in highly liquid markets (equities in OP) will
lead to more inefficiency.

------
Namrog84
Since when are traders "the Masters of the Universe"?

Apparently a 1987 reference to a Tom Wolfe novel? Is this phrase commonly used
in finance? or just a sensationalized title from the author. I feel like if
any profession is going to be given that title, it should be engineers and
scientists. Though I am definitely biased.

~~~
fullshark
It's a Bonfire of the Vanities reference which was a He-man reference for
sure. It's tongue in cheek.

------
hugodahl
I am curious how the compensation of the engineers compares to that of the
traders, whose job function their systems have replaced. Not only base salary,
but bonuses, commissions, and all those extras. Do the engineers get
comparable extras, or are they a "flat cost"?

~~~
flukus
If my experience in finance is anything to go by then they're the cheapest
engineers money can buy.

------
lovich
The article talks about the number of traders they replaced with engineers.
Assuming that other investment banks are on the same trend, where are these
traders going to get new jobs? Are they just retiring because they made enough
money while trading?

~~~
dx034
That was done over a decade or so. Many people will have retired, some
continued working in another function, some just went somewhere else. There
are still many traders out there, the market is not that much smaller than 10
years ago.

------
0xfaded
Does anyone know ballpark salaries / bonuses for financial firms.

As someone who knows Scala and other functional languages I get a lot of
recruiter spam with 200k+ tag lines bit I've never really pursued the issue.

------
Animats
"Those 600 traders, there is a lot of space where they used to sit."

~~~
user5994461
May the next article be "Goldman Sachs reorganizes the free space into a small
office layout" then we're all moving back to Goldman :D

------
blazespin
fun fact: Advanced AI techniques work in very high dimensional spaces in such
a way that it's impossible to clearly understand why a program reaches a
conclusion that it does. Market trading is about allocating capital that
decides how labor itself is allocated. So, increasingly, we have computers
that are telling people what to work on and we don't know why they are making
those decisions. We could remove the computers, but then our economy would
likely fall into a deflationary spiral / depression due to lack of growth.

~~~
dx034
Those engineers are probably not working on AI. The traders were receiving
phone orders from clients and executed them. Now there's a platform where
clients put in trades which get executed. The engineers develop the platform
and enable the remaining traders to trade orders efficiently.

It's probably at least 30% front-end web developers, many testers, some back-
end developers. Execution only trading engines aren't that hard to develop.

------
known
AKA
[https://en.wikipedia.org/wiki/Peter_principle](https://en.wikipedia.org/wiki/Peter_principle)

------
bitmapbrother
I wonder how long it is before those 200 engineers gets reduced to 150
engineers and then 100 and then 50 and then 10 and then 2.

------
curiousgal
[https://en.wikipedia.org/wiki/Long-
Term_Capital_Management](https://en.wikipedia.org/wiki/Long-
Term_Capital_Management) ??

Edit: Due to the swift downvotes, let me elaborate. I am not saying this will
be the case, I just think that philosophically, blind reliance on algorithms
can be catastrophic.

~~~
forgetsusername
> _blind reliance on algorithms can be catastrophic._

And in other places, _basic_ algorithms smash human judgement:

[https://www.amazon.com/Clinical-Versus-Statistical-
Predictio...](https://www.amazon.com/Clinical-Versus-Statistical-Prediction-
Theoretical/dp/0963878492/ref=sr_1_1?ie=UTF8&qid=1486504647&sr=8-1&keywords=Clinical+vs.+Statistical+Prediction%3A+A+Theoretical+Analysis+and+a+Review+of+the+Evidence)

------
Shalhoub
"Goldman Sachs automated trading replaces 600 traders with 200 engineers"

You mean 600 traders replaced with a High Frequency Trading (HFT) computer.

[http://bertdohmen.com/hft-algo-computers-crash-fx-
markets/](http://bertdohmen.com/hft-algo-computers-crash-fx-markets/)

~~~
LudoHK
Very different they are not talking about HF, it's more about automatize all
the processes of entire desk especially around equities. they are not
mentioning at all about HF in the article.

