We often wonder if unskilled labor is most susceptible to displacement by automation; however, large Wall Street firms are becoming increasingly automated beyond just complex trading algorithms, showing us that skilled labor is also at risk.
According to an article published by the MIT Technology Review, Goldman Sachs employed 600 equity traders at the start of the new millennium. Just 17 years later, that number has dropped to two. Some say this is just a harbinger of the transformation to come.
Marty Chavez, Goldman Sachs’s incoming CFO, thinks automation will not be relegated to just equity trading. Trading in currency and futures markets will become more automated, along with areas of finance that rely more heavily on human interaction and relationship building, like investment banking. Chavez has found that with currency trading, four traders can be replaced by a single computer engineer. Consequently, a third of Goldman’s staff are now computer engineers.
Chavez thinks that investment banking is in dire need of disruption. Since the job requires salesmanship and people skills, many investment bankers won’t lose their jobs entirely. Rather, Goldman Sachs has identified 146 steps taken during the process leading to an initial public offering that “are begging to be automated,” Chavez said.
Increasing automation in investment banking could significantly reduce costs for large banks.
According to Coalition, a UK firm that tracks and researches the finance industry, large banks, like Goldman, employ investment bankers working on corporate mergers and acquisitions for an average wage of $700,000 per year. As investment banking becomes more automated, banks will need less low-level employees. Babson College professor Tom Davenport believes that for those workers that do remain, there will be a major growth in the distribution of income similar to the broader economy. According to Davenport, “The pay of the average managing director at Goldman will probably get even bigger, as there are fewer lower-level people to share the profits with.”
With automation spilling into areas of finance beyond trading, we could see a paradigmatic shift in the way large banks operate. Along with the proliferation of fintech startups in Silicon Valley threatening to capture market share, Wall Street firms must innovate to stay competitive.