The titans of Wall Street

Katie Martin (0:06)

Pushkin. A whole bunch of massive trading companies have sprung up in the past few years, but rather than having huge rooms full of shouty old school traders on phones blaring at each other like in the good old days, they have computers and super smart coders. We've been writing all about these new Titans of Wall Street in the FT recently, and you really must check out that excellent series. But today on the show, we're asking, do we welcome our new robot overlords? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, and I'm joined down the line from Oslo by yet another Norwegian Titan, although you'd never know it from the name, Robin Wigglesworth. Robin, how are you doing?

Robin Wigglesworth (0:56)

I'm doing pretty well, though it's cold here in Norway now.

Katie Martin (0:59)

Oh, really? How cold?

Robin Wigglesworth (1:00)

Too cold and too dark. I don't want to even talk about it. It's depressing.

Katie Martin (1:05)

So these titans, these super nerds who are kind of controlling the markets now, this has been a passion project of yours for a while, right?

Robin Wigglesworth (1:13)

Yeah. I think I first pitched a series like this 10 years ago now. Then you really saw it in the stock market. They were really huge and frankly had completely obliterated the banks in that area. But now they're spreading their wings, they're growing bigger, they're more ambitious, and they're making just obscene amounts of money.

Katie Martin (1:34)

So back when I was a cub reporter, I spent some time being sort of toured around trading floors in the city and spend a little bit of time there. The traders would write down on a little yellow piece of paper, the time, the price, and the counterparty of the thing that had been traded, put the little yellow piece of paper to one side, and then someone would scoop up the piece of paper and reconcile all the trades at the end of the day. Pretty obviously, that was quite ripe for technological.

So, you went from the point where you no longer have to call up five banks. You just get a machine to automatically ask five banks and then pick out the best price for you. And that's kind of how this all evolved, right? But the point is that 20 years ago, the banks were at the center of this. So, how did they lose their grip? How did they let this go to a bunch of companies that normal people have never heard of?

Robin Wigglesworth (2:29)

It's technology, right? I mean, we've seen it in many other areas that are fundamentally like, people are the incumbents, they're big, they're strong, they think nobody's going to take their lunch money. And then somebody comes who's smarter, nimbler, usually uses technology to do something better, faster, more efficiently. And that's basically what it was. The banks for a long time thought was like their personal playground, like the bond market. There was no way algorithm would ever work there. And lo and behold, we are actually seeing now that, you know, most US government bonds trade by algorithm today, not by people on the phone. And I think banks were just really slow to wake up to this.

Katie Martin (3:11)

Yeah. I mean, banks were slow, but there was a couple of, you know, big pieces of regulation over the years as well, especially since the financial crisis of 08, 09, that sucked risk away from the banks. Like, basically, politicians and just the public at large got sick and tired of banks being this nexus of risk that could just spread across financial systems. And it was time to spread that more evenly in a more heavily regulated way. So one of the things that's happened as a result of that is this flourishing of what we call the shadow banking system, right? And you have, you know, lots of different parts of the financial system, like private equity companies and pension funds that are like not banks, but that are really important areas where risk can kind of coagulate. And on trading, it pushed a lot of trading, a lot of risk away, again, away from banks and into these other places. You know, why is that? It's around, you know, people talk about warehousing of risk. What does that mean?

Robin Wigglesworth (4:13)

Well, essentially the banks, one of the ways they were able to compete for quite a long time after trading became electronic was that they were just massive warehouses of stocks, bonds, currencies, whatever. Smaller trading firms couldn't do that. So if you're a Goldman Sachs or JP Morgan, you'd have essentially, imagine it's a big Costco or a Tesco or a big shop. Everything you want to buy, you can just get right there. You just walk into JP Morgan and say, I fancy a bit of IBM bonds or give me $20 million worth of Tesla shares. They'd have it there or be able to get it really quickly. But eventually what we found out that those warehouses were risky, they stored all sorts of crap there before 2008, and it blew up the shop. So we had to bail them out. After 2008, yes, all these regulations basically meant that banks were not able to warehouse as much as they used to. The financial securities, they used to carry on their own balance sheets for buying and selling, sometimes, frankly, for their own profit, not even for clients. They were basically like big, sprawling hedge funds. That was basically ended. So technology had already caught up. The trading firms had already established themselves in places like the stock market. But after 2008, all the regulation that came afterwards, essentially, it changed the game in every market to a greater or lesser extent.