A return to normalcy?
As the markets begin to contemplate a return to a new normalcy, with some previously closed trading floors looking to re-open, many are catching up and sharing stories amid the COVID-19 pandemic. In conversations with traders, some say the transition to remote trading was seamless while others say it was more difficult. Still others said that returning to skyscrapers and packed elevators were the biggest concern.
But one thing everyone can agree on is that the trading markets survived. Exchanges, dark pools and other venues continued to serve the needs of institutional investors and John Q Public. As one executive told Traders Magazine, “we never faltered, kept costs down and traded like no tomorrow.”
So, the most obvious effect the pandemic had on the markets was trading from home. For an industry that was so used to being in buildings with more than 10 floors, packed elevators and security checkpoints and IDs, traders could now execute order flow in pajamas from their den, office or even bedroom.
Who would’ve thought?
“If you would have told me in February that by the end of the next month we would all be working from home, I would not have believed you,” began Jack Miller, Head of Equities at Baird. “Now in early May, we have the vast majority of our team working from home, where they have been since mid-March, and our New York office is essentially empty.”
Most of Miller’s peers on the street are in a similar situation. Like many on Wall Street, Baird and other firms had never considered the working from home (WFH) idea due to feasibility concerns about the technology, among other reasons.
“But so far the technology has held up nicely and – knock on wood – the migration has been minimally disruptive to our business,’ he said. “Baird has a diverse portfolio of businesses and our technology team has done phenomenal work executing the move to WFH across multiple businesses while contending with considerable uncertainty.”
For some of the larger brokers the transition has been easy – as plenty of staff and cash on hand that a Morgan Stanley or Goldman Sachs would have. But for the mid-tier firms and smaller ones the transition can be costly or at its worst, difficult on multiple fronts.
“The transition has not been without challenges. We’ve had to rely more on our technology to ensure communication among our team, given we can no longer rely on the ambient interactions that are so common on trading desks,” Miller said. “We’ve had to go out of our way to recreate the natural touch points that come up naturally in an office environment. But we have adapted and could continue to operate this way for the foreseeable future – which is fortunate given the uncertainty around the timeline of our return.”
He added that the success of COVID-forced WFH experiment quickly led to questions about what the “new normal” might look like. Will we all go back to the office when this is over?
“On one hand the experiment has largely been a success. We can stay connected with our clients and teammates remotely,” he said. “We can handle periods of extraordinary volume and volatility. The technology works. Those with long commutes suddenly have hours added back to their days. There is a degree of flexibility afforded to us that we’ve seen permeate other industries but has been elusive to Wall Street.”
Until now. But, as Wall Street is keenly aware – at what cost? And is it a risk/return value proposition worth engaging in for an extended or permanent time.
“On the other hand, traders are a self-selecting bunch, and we’re now thrust into a work environment that we didn’t sign up for,” Miller said.
Routines are disrupted. No more water cooler or trading floor camaraderie.
“We miss the banter. We miss the face-to-face relationships. We miss food on the desk and drinks with clients and colleagues after work,” Miller answered honestly. “And the sheen of WFH rings hollow for those living in smaller quarters or sharing space with small children or reluctant live-at-home college students. For those, WFH represents not freedom and flexibility but rather the destruction of structure.”
So, who needs a juice box? Daddy needs five more minutes in his office, OK? Then we can play.
“Fortunately, the markets have kept us busy since,” Miller said. “Aside from a few of the most volatile days during the March decline, the action on our desk has had a surprisingly orderly feel despite the frenetic pace. There are winners and losers; real investment convictions are being expressed in the market.”
Stock-pickers are having a moment.
While the volatility has provided a burst of activity, it is impossible to know how long it will last. And with that volatility comes increased trading commissions. Cha-ching!
But will brokers be able to turn the corner on years of declining commissions and post some healthy profits?
Miller advises to keep the champagne in the fridge – at least for the moment.
“It is far too early in the year to tell whether 2020 will mark a halt to decline in equity commissions that have been ongoing since the financial crisis. Clearly, much depends on what the second two-thirds of the year has in store from a volatility standpoint,” he said. “And when the storm does subside there will be damage – many of our clients may find themselves with depleted assets, budgets, or both and we could find ourselves downshifting from already depressed levels. Still, based on what we have seen so far, 2020 holds the most promise to reverse the trend in some time.”