Lessons from Covid-19

Trading desks have seen unprecedented tumult in 2020, as COVID-19 relegated traders in New York, London and other financial hubs to their home offices starting around mid-March.

Along with this came big spikes in trading volume and volatility, as investors assessed the economic impact of the virus and the monetary and fiscal policy response.

For institutional sales and trading desks, remote work presents many challenges. Collaboration and information sharing suffers as data dissemination is slow or nonexistent. Customer service can deteriorate due to less effective and timely communication, which can result in missed trading opportunities and even longer-term damage to customer relationships.

Automation tools can help sell-side traders bridge the communication gap between working side-by-side with colleagues on a physical trading floor, and working from home.

Sell-side brokers leading on automation are best situated for high-volume, high-volatility markets -- not necessarily because of the automation per se, but because the automation chops wood that the trader then doesn’t have to, enabling the sales trader to provide more personalized service to clients when they may need it most.

Going forward, sell-side firms will continue to increase automation over time, both by increasing the percentage of order flow being automated, and expanding into more bespoke asset classes such as municipal bonds and repurchase agreements, or repos. The primary motivation is top-line growth, rather than cost reduction.

According to Celent research, 73% of capital markets participants expect that increasing revenue will be the business focus of the trading desk over the next three years, while 27% expect the focus to be cost cuts. That would be a departure from the past three years, when 68% cited cost cutting as the focus.

Goldman Sachs has been investing to develop next-generation electronic trading platforms in FICC and equities.

"These investments draw on our returns in the short-term, but are critical to expanding our capabilities and our competitive position."

David Solomon, CEO, Goldman Sachs - October 2019

On the same earnings conference call, Goldman Sachs Chief Financial Officer Stephen Scherr elaborated on the sell-side firm’s strategy. “We were investing to expand our capabilities to automate workflows, serve our clients electronically and deliver structured solutions in efficient formats,” he said. “In our credit business, we are making considerable progress utilizing our systematic platforms to efficiently price, risk manage and execute trades.”