Monday, December 13, 2010

NYT: Even Daytrading is Slowly Being Outsourced

Hmmm... here I thought this would be one of the jobs that the former middle class could hold on to, but I suppose hiring a daytrader in China for 1/10th the cost errr free does make sense.  It probably also helps to explain the voracious appetite (at any price) for some of these Chinese IPOs.

So as the futures landscape emerges, Indians will do the investment banking analysis [Aug 15, 2008: NYT - Cost Cutting in New York, but a Boom in India], the Chinese will do the trading, and U.S. will do the shopping at the malls.  We truly are the chosen people.

Via NYT:
  • Before the opening bell sounded on the New York Stock Exchange on a recent Tuesday, a group of fresh college graduates clocked in at a small trading firm on the outskirts of this capital city (Beijing). They were hired to engage in rapid-fire stock trading with some of the world’s most powerful investment houses in New York, London and Tokyo, and they were instructed to be alert. “The market could be volatile today,” King Chan, the general manager at the firm, Lazer Trade, shouted to the group during a pep talk. “Be careful at the open. And don’t take dumb risks!”
  • Mr. Chan’s day trading shop is one of many that have sprung up in and around China’s major cities in recent years. Trading firms based in the United States and Canada are recruiting inexpensive workers in China and teaching them to engage in speculative trading — which means repeatedly buying and selling shares listed on the New York Stock Exchange and Nasdaq, hoping for quick profits.
  • By some industry estimates, as many as 10,000 people in China are doing speculative day trading of American stocks — mostly aggressive young men working the wee hours here, from 9:30 p.m. to 4 a.m., often trading tens of thousands of shares a day.  “Trading groups have exploded into China,” says Stephen Ehrlich, chief executive at Lightspeed Financial, a New York company that sells trading software to firms operating in China.
  • China prohibits its citizens from using Chinese currency to buy or sell shares of companies listed on foreign stock exchanges, though there appears to be no prohibition against trading stocks for an account owned by a foreign entity.  That legal gray area has enticed several American and Canadian trading firms to set up shop here, at least partly to cater to wealthy clients seeking more diverse investment options.
  • Securities experts are puzzled by the operations. They question how the firms can profit by using inexperienced traders. They also wonder aloud whether the use of traders in China violates American and Canadian securities laws.  “This is a jurisdictional mess for the U.S. regulators,” says Thomas J. Rice, an expert in securities law at Baker & McKenzie. “Are these Chinese traders essentially acting as brokers? If they are they would need to be registered in the U.S.”
  • Officials at the Securities and Exchange Commission and their counterparts in Canada and China declined to comment when asked about the growth of day trading in China.  (one wonders if this story was the first time they were even aware of it)  The New York Stock Exchange and Nasdaq also declined to comment.  (the exchanges love ANYTHING that creates volume)

  • Some of these firms say they can profit from trading operations in China through a combination of cheap overhead, rebates and other financial incentives from the major stock exchanges, and pent-up demand for broader investment options among China’s elite.  (this is like the poor man's High Frequency Ttrading - while HAL9000 can create billions of transactions to receive those rebates from the exchanges, the other option is to employ cheap labor overseas to do the same thing... of course they cannot do it in 1/4000th of a second)
  • Most of the firms say they put up their own capital or capital from private investors in the United States or Canada to open an affiliated trading shop in China. They hire young Chinese to trade for them — often with no standard salary but a promise to share in any profits.
  • Peter Beck, a founder of Swift Trade, a Canadian firm with about 1,500 traders in China, said his operation was thriving and that the firm got a share of the trading profits.  “Our clients — they open an office, give us the money and then hire people to trade for them. That’s our structure,” he said in a telephone interview.
  • One of those risk-takers is Mr. Chan, a 25-year-old American citizen who says he left a job at JPMorgan in the United States last year to invest and manage Lazer Trade.  Some 200 people have applied for jobs at the company in the last two months alone, Mr. Chan said. Turnover is high, with workers typically moving on after four or five months. Very few stay for more than a year.
  • At a Beijing affiliate of Title Trading, the manager — who asked not to be named because he worries about the chances of finding another job if his operation fails — said he moved here from Canada because of the advantages of operating a trading desk with Chinese who were willing to start trading for little or no salary. “Before, when a trader could earn $4,000 to $5,000 a month, Canadians wanted to do it,” he said. “But if it’s $1,000 they won’t. So it’s like anything else: outsource to China.”  (darn overpriced Canadians - demanding a salary? Outrageous)
  • College graduates typically earn $300 to $400 a month in China, but labor experts here say that as the job market for white-collar workers has weakened, more of them have been willing to take their chances in jobs with no guaranteed pay but with opportunities to share in profits.
Like many fields, we see too much global labor chasing too little work - hence, prices for labor will fall in anything that can be easily outsourced.  Just another small example.

  • For their part, the trading firms say they have unique trading strategies that give them an advantage. Some say they use sophisticated risk management software that can, for example, interrupt trades after a series of losses to prevent large losses in a single day. But they concede that losses can mushroom.
  • Still, the growth of trading here suggests someone is making money — and many trading houses say they are generating huge trading volume. Mr. Chan at Lazer Trade, for instance, says his branch office, with about 20 employees, trades up to five million shares a day.  (indeed, human HFT)

How do these Chinese traders train? Online gaming of course:
  • Although many traders say they earn less than $200 a month, (take that overpriced Canadians) ......and say they prepared for the business by playing online games.  “Day trading is like a battlefield,” says Qu Zheng, 24, who has been trading for over two years and typically trades a million shares a day at Lazer Trade’s office in Beijing.

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