Rookie Currency Traders Are Causing Big Problems

  • Job cuts leave fewer senior staff to handle black-swan events
  • Inexperienced traders amplified pound’s flash crash, BIS says

Rookie Currency Traders Are Causing Trouble

It’s been something of a common lament among Wall Street veterans for a while now. And it goes, more or less, like this: All these darn twenty-something-year-olds around here have no idea what they’re doing.

Perhaps it’s just the typical grousing of community elders, but last week, the Bank for International Settlements said there may be something to the notion.

Tucked deep into a report on foreign-exchange market liquidity was a brief paragraph on how rookie traders could be partly to blame -- along with falling volumes and the growing prevalence of electronic trading -- for the flash crashes that have roiled the $5.1-trillion-a-day currency market over the past two years.

One case the BIS found particularly worrisome was the time last October that the pound plunged 9 percent in a matter of minutes during early trading hours in Asia. The organization concluded that “less experienced” traders handicapped by a limited knowledge of which algorithms to use at that moment “amplified” the rout.

For Keith Underwood, the report just confirmed what he’s known for a long time.

“If there’s a shortage of senior people, there’s a shortage of knowledge,” said Underwood, who runs his own foreign-exchange consulting firm after a 25-year trading career that included stints at Lloyds Banking Group Plc and Standard Chartered Plc. In his trading days, he said he was leery of handing off positions to junior staff in other regions overnight. “I’ve certainly adjusted my orders, and I’ve also adjusted my sleep.”

Younger, lower-paid employees make up a greater percentage of trading desks today than they have in years.

Part of banks’ broader effort to cut staff, boost electronic trading and lower costs following the global crisis, the “juniorization of Wall Street,” as some call it, has been especially acute in the foreign-exchange market. The world’s 12 largest global banks cut front-office staff by about 25 percent in Group-of-10 currency markets over the past four years, according to Coalition Development Ltd.

That’s coincided with a shift to automation, which slashed staffing needs and spawned a new, and small, generation of quantitative traders whose decisions are driven by mathematical models. For every managing director with about 10 years or more on the job, there are as many as seven less-experienced staffers on currency desks, Coalition said. The ratio was one-to-four just five years ago.

“The old hands who have seen crazy things happen, they’re gone,” said Michael Melvin, a professor at the Rady School of Management at the University of California San Diego and a former managing director at BlackRock Inc.

‘World Is Ending’

BIS’s write-up on the effects of juniorization, which stemmed from discussions with market participants, echoed conclusions put forth in an earlier study that BIS staffers did in tandem with the Bank of England.

Franz Gutwenger, a recruiter in New York, estimates that about 75 percent of recent job openings at banks’ currency desks were for candidates with three to five years of experience. The advertised roles are mainly for assistant vice presidents with base salaries of up to $150,000 a year, or vice presidents who earn about $200,000 a year. That kind of pay is a fraction of the salaries that top traders can make.

Having so many inexperienced people manning a trading desk is risky, Gutwenger said, and senior staff should be on hand in critical situations. Melvin said that many young traders can panic and think “the world is ending” when suddenly exposed to a market crisis.

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“For many of the jobs, day-to-day, it’s all good, there’s no issue," he said. “But when extraordinary events happen, it really is useful to have some seasoned old hands around.”

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