With computers “pulling the trigger” on trades, ample job opportunities exist for stock traders who can write the software, an expert on algorithmic trading said Tuesday.

“Fewer traders are needed to do basic trading tasks with the advent of algorithmic trading,” said Dr. Terrance Hendershott, associate professor at California-based Haas School of Business at the University of California, after his talk at the Toronto Board of Trade.

“Traders have to expand their skill set, because someone has to write these algorithms,” he added. Compared to the early 1990s, the practice of algorithmic trading, using a computerized system with built-in mathematical models to optimize transaction decisions, was virtually non-existent. Today, computer-based algorithmic trades account for a one third of the trading volume in U.S. marketplaces, said Hendershott.

“Eventually, we are headed towards a system, where an exchange is just connecting a bunch of computers together, and computers are making most of the decisions themselves,” said Hendershott. Traders wishing to stay in the business must advance their skills, above and beyond the transactions that computers can now do.

Through various statistical methods, Hendershott’s analysis works towards establishing a connection between the technology in markets such as the New York Stock Exchange and increased market liquidity. Spreads between bids and ask prices for securities remained relatively flat for 50 years, he said, when analyzing market data from 1920 to 1970.

However, with technology improvements made in the 1990s to enable algorithmic trading, price spreads tightened dramatically over the next 20 years, since transactions could be conducted on multiple marketplaces at a faster rate. This also lowered trading costs for dealers, who watched their costs drop on a per trade basis, he said. During the 1990s, liquidity also rose during the same period.

“Most broker dealers are offering algorithms, this is how they first got popularized, where if you have a number of companies trading the same securities, competitive advantage lies in optimizing trades on a number of factors — such as price, time and quantity to minimize trading costs,” he said. “More hedge funds [now] run a small scale [trading] operation, with a lot of technology and use a lot less people.”

Hendershott’s lecture was the third of a five part series on market structure issues, organized by the Investment Industry Regulatory Organization of Canada and Hamilton-based DeGroote School of Business. The series began in April and runs until October this year.

IE