Derivatives traders replaced with machines

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, 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, Credit Suisse Group AG and Goldman Sachs Group Inc. 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.”

$250 Million

UBS’s algorithm, which can trade as much as $250 million of the Markit CDX North America Investment Grade index and $50 million on the speculative-grade benchmark in one transaction, was introduced last month, the people said.

Megan Stinson, a spokeswoman for Zurich-based UBS, declined to comment, as did Gallers.

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.

Outstanding contracts ballooned to more than $62 trillion at the market’s peak in 2007 from $632 billion in 2001 as the derivatives gained popularity as a way to wager on debt without owning bonds or loans, data from the International Swaps and Derivatives Association show.

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