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Finance: A New Breed Of Trader Is Threatening The Wall Street Establishment

Finance A new breed of trader is threatening the Wall Street establishment

  • Published: 20.41
  • Matt Turner

More and more trading is conducted on electronic platforms, handing an opportunity to new, tech-savvy players.

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(AP Images)

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  • More and more trading is conducted on electronic platforms, handing an opportunity to new, tech-savvy players
  • These “non-bank liquidity providers” account for 15% to 35% of volumes in spot foreign exchange and stock markets
  • They’re now pushing in to new markets, and could win $2 billion to $3 billion in revenues

Wall Streeters call it “electronification.”

Bustling trading floors, where traders for years elbowed each other out of the way to land a trade, gradually close down. Trading moves to electronic platforms, and new smarter, faster tech-savvy players emerge.

It’s already happened in foreign exchange and the stock market. According to Morgan Stanley and Oliver Wyman, non-bank liquidity providers the newer tech-savvy entrants now account for 15% to 35% of volumes in spot FX and developed listed equities markets.

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“High frequency traders were first, but the new and more threatening class of entrant deploys capital and takes positions to support market making,” the two firms said in a joint report. “Non-banks benefit from lower regulatory costs, but most importantly they rely on market-leading algorithms and data interpretation rather than salespeople and traders to deliver tighter prices in the market.”

Right now, non-banks are most active in the low margin parts of the trading business, with Morgan Stanley and Oliver Wyman estimating that these firms only compete for ~15% of the fee pool.

The question, then, is which market will be the next target of these new players.

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(Morgan Stanley/Oliver Wyman)

The chart above provides a handy guide to the markets where these players might make headway. Morgan Stanley and Oliver Wyman said swaps and bond trading is most likely to come next.

“Some non-banks will look to strike deals with smaller banks to effectively out-source market making,” the report said. “Others will look to rent technology to banks in a more traditional approach. Our analysis suggests that over the next 2-5 years non-banks could take $2-3BN of revenues from the Wholesale Banks.”

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