European stockbrokers may find it hard to escape unscathed as sweeping regulatory changes lead to a boom in the use of high-tech systems designed to remove the human element from trading and radically reshape markets.
Complex algorithmic computer systems -- designed to monitor thousands of stocks and independently identify and execute orders in milliseconds -- are revolutionizing Wall Street and demand is quickly catching up across the Atlantic.
We're looking to take humans out of the equation where it makes sense, said John Lowrey, European head of execution services at Lehman Brothers, striding past hundreds of dealers glued to their screens on the bank's vast London trading floor.
The November introduction of Europe's Markets in Financial Instruments Directive (MiFID), aimed at boosting competition between banks and exchanges and cutting costs for investors, is proving a major catalyst for the switch to algo trading.
The far-reaching regulatory changes will oblige firms to offer best execution on client orders, and see stock exchanges face competition from banks and brokers who will be allowed to trade shares in-house.
People are going to increasingly need algorithms to work in an environment that seems likely to be more complex as a result of increased competition between trading venues, said Richard Balarkas, head of Advanced Execution Services sales at Credit Suisse.
MiFID doesn't remove barriers which are there stopping people using these tools, it acts as a catalyst so things are already moving and will move faster under MIFID.
Changes which have forced fund managers in the UK to unbundle research payments from execution costs have also put additional emphasis on cutting the price of trading.
It's simple today, there's one place to trade any given stock, it's going to be more complicated next year when we're trading in five or six places simultaneously, said Steve Vandermark, European head of algorithmic trading and analytics at Lehman. But from a client's perspective, they're just getting good execution across a fragmented landscape.
Market estimates calculate algo trades currently account for about 40 percent of volumes on the London Stock Exchange (LSE.L: Quote, Profile, Research) which recently launched a new electronic system to execute 10 millisecond trades as volumes jump and competition intensifies.
In the United States, Boston researcher Aite Group says around a third of U.S. equities trading is already done using algorithmic systems and expected to grow to 50 percent by 2010.
As well as executing trades at lightning speeds, algos with names such as snipers, guerrillas or sniffers are programmed to hunt out rivals' strategies, disguise trades and take advantage of market anomalies.
Others seek out so-called dark pools of liquidity -- the private trading networks which enable both buyers and sellers to remain anonymous until trades are executed.
European hedge funds, proprietary trading desks, broker dealers and regular fund managers are opting for algos, despite some pointing out the relative lack of liquidity in the region versus the U.S. and the smaller universe of tradable stocks.
If money managers can see a means of getting 50 basis points back, that could lead to a massive increase in a fund's overall performance by the end of the year, said Balarkas, who estimates over 30 percent of Credit Suisse's European client flows are traded through algo systems.
Everyone's interested in measuring execution performance.
LONG LIVE THE TRADER
With some predicting the number of traders in the United States will plunge by as much as 90 percent by 2015, job security for European traders could soon also be in jeopardy.
Algorithmic trading is without doubt here to stay. I don't think the trader is dead, but the trading job will change dramatically, said Dave Cliff, professor of computer science at the University of Bristol.
Very soon, we'll see the hardware that humans are provided with, the flesh and blood that we're built from, is not the best for processing a large amount of data in a small period of time and reacting appropriately in a sub-second timeframe.
But while the future for thousands of traditional stockbrokers and dealers could be at risk, the outlook for maths, physics and computer whizzes could not be brighter.
Hedge funds and banks are paying lucrative salaries to tech-savvy graduates to develop and trade electronic systems, who may have doctorates in nuclear physics and engineering or experience developing robotics rather than business degrees.
In every bank, every hedge fund, there's a huge demand for these kind of people. The kind of deals they're cutting are crazy. A lot of the hedge funds are offering a percentage share of the business, said Leon Devereux, director of global trading practice at recruiter NJF Search International.
However, some say algo systems generally only execute hefty trading volumes and many clients would still prefer to discuss ideas and strategies with dealers at the end of a phone line.
My initial reaction is there won't be bloodletting, one has to remember that human beings have to make the decisions and decide the strategy, said Les Ames, chairman of the London Stock Exchange Veterans charity and a trader at WH Ireland.
What you have to remember about algorithmic trades is you're only as good as the fuse and the plug in the wall.