What goes around, comes around. From Bloomberg News, we read the following (boldface mine):
Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.
UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.
UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.
“It’s natural to push away from humans and large size to machines and small size,” Peter Tchir, the founder of New York- based TF Market Advisors, said in a telephone interview. “It’s been gaining momentum.”
…Automated trading of swaps marks a shift in a market where transactions historically have been negotiated over the phone after dealers, acting as a go-between for clients, send out indicative prices by e-mail. The dealers offer to buy a swap from a client at one price and sell the same contract to another for a higher amount, profiting from the gap, known as the bid- offer spread…
As late as 2005, managing directors on credit-derivative trading desks were being paid an average $250,000 in salaries and $1.75 million in bonuses, Michael Karp, co-founder of executive-search firm Options Group, said in a 2006 interview with Bloomberg News.
Building an algorithm may cost a few hundred thousand dollars, said Tchir, a former credit-derivatives trader.
Of course, there might be some problems letting Skynet be your broker:
“I don’t think it’s driven by a desire for efficiency as much as a desire to control costs,” Bonnie Baha, head of global developed credit at Los Angeles-based DoubleLine Capital LP, which oversees more than $45 billion, said in a telephone interview. “The cost of a major trading error which could possibly be avoided by having a real human person sitting and thinking about things will far outweigh the personnel costs they save by firing all these guys.”
Somehow I don’t think there’s going to be much sympathy from ex-manufacturing workers who saw their hourly wage drop from $25 per hour to $10 per hour.
Just a hunch.
So how long before the social cost of automation becomes an issue? Because our political discourse really doesn’t pay attention unless it affects the one percent.