Speaking Out
by Gedon Hertshten
New Talent:The Need for Exchanges to Invest in Liquidity Provider Recruitment
Article provided courtesy of Futures Industry Magazine, January/February 2009 Issue
Proprietary trading firms have become a vitally important source of liquidity for the major futures exchanges in recent years, yet they remain almost invisible to the outside world. In the following article, the head of a major trading firm argues that exchanges could and should do more to help this community recruit the next generation of derivatives traders and trading system developers. The exchanges should focus in particular, he argues, on promoting the industry in Eastern Europe, Asia and the Middle East, where there is an abundance of human capital but relatively little awareness of the career potential in the derivatives industry.
There have been two significant changes in recent years which have created a new environment in the futures industry; the first is electronic trading, the second is the development of exchanges as “for profit” enterprises. These have resulted in critical changes to the dynamic of the futures industry which will have significant consequences for its future.
As a result of becoming for profit enterprises and the additional pressures of having to respond to the demands of their investor-owners, many exchanges are forced to pay more attention to short-term profitability at the expense of long-term growth. Some exchanges have neglected to invest in growing one of the cornerstones of their success, the liquidity providers. While it might be convenient for the exchanges to leave the matter to members and hope they grow organically, this approach is not sustainable in the long run and action must be taken now in order to prevent the markets from drying up.
As someone who has been in this industry for the last three decades, and as the head of one of the leading trading groups, this situation causes me a great deal of concern. To continue the exceptional growth of our industry, we must focus our attention to attracting new talent in new locations across the globe such as Asia, Eastern Europe and the Middle East. In these locations, there is an abundance of highly motivated, talented, and well educated young people that will provide our industry with the human capital necessary to thrive.
Attracting new talent, though it may sound easy, is anything but. Our industry is competing with many others over a finite pool of capable, young university graduates who have the skill set to succeed in what is undoubtedly an extremely demanding profession. These young talents, whose skills are desired by an array of various industries including banks, insurance and high tech, are vital to the continued growth of the derivatives trading industry in the form of new traders and automatic trading system developers.
Without attracting new talent, there is a real danger that the growth of the derivatives trading industry will significantly slow, possibly to a halt. The cost of identifying, recruiting, and training new talent is significant, and trading groups often opt to recruit proven individuals from competing firms rather than hire raw talent. While luring traders from competing firms can offer many benefits in the short term to those firms who are able to recruit them, it does not address the need to grow the talent pool employed by the liquidity providers. The talent pool that the industry must actively seek and recruit consists of technology-savvy, extremely intelligent young individuals who are willing and able to work the long hours the exchanges are open. In addition, it is vital the individuals be familiar with the economic workings that are at the core of any form of trading as well as understand the specific products they trade. New talent of the sort the industry should be recruiting can be found in the science and engineering departments of developing countries’ top universities. Currently, there is a lack of awareness amongst many of those students that careers such as the ones offered by the derivatives industry even exist, and those who have had some exposure to the industry from the mass media tend to be intimidated by misconceptions about what it entails.
In order to attract the desired talent in the parts of the world where we are currently underrepresented, several options are available to the exchanges. First and foremost, the exchanges could work together with the universities in developing advanced financial courses and guest lectures aimed at enhancing the level of knowledge and awareness of graduates. For example, the Chicago Board of Trade for many years has supported an Asia Pacific futures research symposium in partnership with universities in China, Hong Kong, Korea, Taiwan and other countries in the region. While it is clear that the investment of time and money required in working with the universities is significant and will not necessarily benefit the industry immediately, it will pay off in the long run by attracting talented individuals most likely to succeed as derivatives traders.
This investment in talent that I am suggesting is very different from the incentive programs that the exchanges are currently offering to liquidity providers for newly employed traders. Those schemes may succeed in attracting some additional volume but they are limited in time, while what is needed is a long-term approach which will provide the industry with a flow of talented individuals bringing increased liquidity to the markets, ultimately benefiting all.
Liquidity providers certainly have a role to play in cultivating new talent, but exchanges are better positioned to take the lead on any broad industry-wide initiative. In addition to working with the universities in developing countries to enhance the development of the needed talent pool, several options are available to those exchanges wishing to assist the growth of their liquidity providers in the nearer time horizon:
• Using the exchanges’ reputation and network to put interested members in contact with educational institutions where the talent can be found, as well as providing educational material to this end.
• Sharing in the financial expenditures required to attract and train new talent in developing countries.
• Partnering with exchanges in the developing world to jointly sponsor educational programs and outreach.
• Helping in educating businesses on how to maximize use of the exchange products.
There is no question that the major exchanges have made enormous investments in technology. All of us have benefited from that investment and the entire industry has thrived as a result. However, the return on that investment will only diminish in the future, and growth in general might even be negative unless actions are taken to grow the pool of talent that participates in the market.
On the face of it, the current financial crisis offers some relief to our markets in so far as it increases the supply of talented individuals actively seeking employment. However, many of the individuals seeking employment are not those sought after by the liquidity providers due to the different skill sets required by the various market participants. Liquidity providers require highly capable, highly educated, young, raw talent in order to continue to grow. These requirements are not necessarily met by those seeking jobs due to the current economic crisis. Furthermore, the increased volatility the markets are currently experiencing is substantially decreasing the liquidity of the markets, exacerbating the need to attract new talent from developing countries.
