As credit trading goes electronic, traders are vanishing. This could become a problem

First the machines came for the equity salespeople and traders. Now, credit traders are getting the same treatment. As credit trading becomes electronic, experienced credit traders from banks are finding themselves out in the cold. 

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"The business has changed a lot," laments one senior credit trader with over two decades' experience in London. "It's a lot more electronic. There's a lot less voice trading and a lot less reliance on relationships. All the banks are trying to automate trades and to get rid of people. A lot of traders of my generation are simply leaving the industry and deciding that they want a change."

Coalition Greenwich says 49% of investment grade trading and 35% of high yield trading in the US now takes place electronically, and this is increasing. In investment grade, the average daily trading volume for electronic trades was up nearly 30% year-on-year through to August. "E-trading is still growing faster than the fast-growing market," observes Kevin McPartland, Coalition Greenwich's head of research for market structure and technology.

While this is good news for electronic traders and banks espousing automation, it's less welcome for the humans being. And it may ultimately also cause problems for the market. 

Insiders say a generation of experienced credit traders is disappearing in London. They include: Vikram Dadlani, the long serving head of corporates and financials trading at Deutsche Bank, who left in late July; Matthias Schwarz, the former head of EMEA credit trading at Bank of America, who left in 2021 and who is now a careers consultant; Mayur Jethwa, a former head of EMEA fixed income currencies and commodities trading at Bank of America, who's been a stay at home dad for the past three years; and Michael Anderson and Ovie Faruq, the former Barclays credit traders who left to build a career with NFTs.

Others have gone to the buyside, or to market making firms. Omar Ghalloudi, an experienced emerging markets credit trader and former MD at Jefferies, went to KNG Securities last October. Basil Eggenschwyler, Credit Suisse's former head of credit trading, is now at hedge fund Brevan Howard. Jonathan Lett, the former head of European financials credit trading, joined Verition in April. 

Schwarz says regulation is partly to blame for experienced credit traders' demise. Under the best execution rules that were introduced under MiFID II around 2015, funds are obliged to execute trades as cost effectively as possible. Trades previously placed by portfolio managers who negotiated with credit traders in banks are therefore now placed by specialized execution people entirely on the basis of price. In theory, these execution specialists can use their own discretion and choose traders offering a more comprehensive service; in reality, Schwarz says they rarely do this because it would mean creating a written log to justify their choice. "Execution specialists are paid comparatively little, and they don't have an incentive to put in the extra effort and justify why they chose to trade for a different reason."

Credit trading was once a lucrative profession. In 2016, documents pertaining to a London court case suggested that senior traders at Bank of America were earning up to $5.5m each. Schwarz says traders were paid by virtue of their relationships. "In my day, the portfolio manager would call the trader and say they had $20m to sell, and the trader might make an offer 0.2% below the price, giving them the ability to make money on the spread. Now, the execution guys will simply trickle out the $20m in small chunks wherever they can find the best price possible."

The upshot is that banks need fewer credit traders with strong buy-side relationships, and that the traders who remain are earning a lot less than before. This might seem like good news for funds, but traders say there's a risk of dire consequences. "The credit market needs trust," says one senior trader. "If you want to move a serious amount of risk, particularly in a difficult market, an algorithm is just not going to do it for you. When volatility increases significantly, liquidity disappears."

Market insiders say liquidity most recently disappeared during the volatility of early August, and that there's a risk of it happening to an even greater extent during future episodes of market dislocation. "You need communication between individuals who know and who trust each other," says one trader. "In situations of stress, clients complain and say there's no liquidity," agrees Schwarz. "It's no one's fault - it's the side effect of the regulations."

Credit traders who've manage to hang onto their jobs and to eke out a diminished living remain hopeful that their time might come again. "As soon as volatility increases, electronic credit trading stops working," says one. "At that point, people switch off the algos and relationships become more important than ever."

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