At UBS, who wins man vs. machine war?


UBS made headlines for its plans to create a brand new company, jettisoning much of its capital markets infrastructure in hopes of creating a brand new business model, one that depends much more on wealth management and commercial banking.

In keeping with this new model, the bank fired the head of credit-default swaps index trading, according to Bloomberg. That certainly could be seen as a symbolic move as much as anything. The bank did not hire a traditional replacement. Instead, the bank replaced the executive "with computer algorithms that trade using mathematical models."

UBS thus joins others "in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive," according to Bloomberg.

UBS's algorithm "can trade as much as $250 million of the Markit CDX North America Investment Grade index and $50 million on the speculative-grade benchmark in one transaction, was introduced last month."

The CDS market is on the verge of radical change, as the it prepares to move to central clearing. The costs of this new market will be high, and automated solutions will likely be one answer. But it will be a long time before automated trading usurps human trading completely. The software just isn't intelligent enough yet, and much of the CDS market--for bespoke swaps, for example--will remain high-touch for years to come. Automation will make inroads to the extent that it actually works.  

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