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Shouts on bond-trading floor yield to robot beeps

The face of automation on Wall Street is a computer hooked up to nine blinking screens that goes by the name Quantitative Market Maker, or Q.M.M.

Until last year, the work that Q.M.M. performs was handled by human traders at JPMorgan Chase, who would shout prices into a phone and yell "Done!" when the trade was executed.

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People stand inside the lobby of the JPMorgan Chase & Co. headquarters building in New York.
Ron Antonelli | Bloomberg | Getty Images
People stand inside the lobby of the JPMorgan Chase & Co. headquarters building in New York.

Now, Q.M.M., which sits on the same floor as those traders in a Midtown Manhattan skyscraper, can come up with the same prices in a fraction of a second. When it completes a trade, it emits a jingling cash register sound, making the trading floor sound like an arcade.

The rise of Q.M.M. points to sweeping changes in one of the most profitable and powerful corners of Wall Street: the fixed-income trading desks where bonds and derivatives like interest rate swaps are bought and sold, generating $80 billion of revenue at the biggest banks last year.

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These trading desks have long been the noisy, competitive heart of Wall Street, and JPMorgan's operation has been the biggest in the world in recent years, bringing in $15.5 billion in revenue last year. In the quarterly results that JPMorgan reported last week, the bank's fixed income operation again turned in bigger revenues than any of its competitors.

But these desks have been so profitable — and so loud — in part because fixed-income trading has largely remained a human business, with each trade negotiated and executed by individuals, generally on the phone. Now, bond trading is quickly moving in the direction of stock trading, which was transformed by automated trading into a low-margin business years ago.

In the past, JPMorgan resisted this sort of change, pushing to maintain the more human style of trading that made it money for years. But the bank ended up losing some of those battles to the computers and had to race to catch up.

Now, as fixed-income trading becomes more automated, the executives who lead JPMorgan's enormous fixed-income desks have been telling their employees that they are not going to make the same mistake again, even if it involves cannibalizing JPMorgan's own profits.

"Industry and particularly banks are littered with those who held on to what was the existing structure for too long," said Troy Rohrbaugh, the co-head of rates, foreign exchange, commodities and emerging markets at JPMorgan. "We've done it ourselves, and we've definitely seen our peers do it."

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"We are 150 percent committed to not letting that happen," added Mr. Rohrbaugh, who is one of 150 people on a newly formed team within JPMorgan focused on pushing more fixed-income trading onto electronic platforms.

JPMorgan is far from the only bank racing to stay ahead of the big changes sweeping the fixed-income markets.

This summer, Barclays appointed the head of its heavily automated stock trading desk to lead its much bigger and less automated fixed-income operation in the hope that he could help transform those desks. And at Morgan Stanley, the two new co-heads of the fixed-income division created a new "e-markets" team almost as soon as they were appointed last year.

These types of moves usually end up helping customers and ordinary investors, who get more transparency into the trading process and lower trading costs. It also helps regulators have a better view on where risks are being taken.

But the moves usually face some level of resistance from inside the banks, given that the automation of markets almost always leads to thinner profit margins and fewer jobs when robots like the Q.M.M. take over some of the work. Still, executives at all the banks say that they will not let a sentimental attachment to existing employees prevent them from modernizing their business.

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Daniel E. Pinto, the chief executive of JPMorgan's investment bank, said he constantly asked about "obstacles or points of resistance that need help to be overcome" within the bank.

"No one wants to look backward and feel that we lost a position that we have today," Mr. Pinto said.

For Mr. Pinto, there is an incentive to stay ahead because automated markets generally result in a few big winners. The banks that manage to ramp up their electronic trading volumes can compensate for the lower profit margins.

Companies that are not in the top rung of automated markets frequently find it hard to be profitable at all. In stock trading, much of the business was taken by upstart high-frequency trading firms that grabbed the work that used to be done by bank traders.

It is still unclear how quickly the face of the fixed-income markets will change, and it is likely that some desks, like those that trade mortgage bonds, will make the transition much more slowly than other desks, like those that trade United States government bonds.

Government bonds are easier to automate because they come in standard denominations, while mortgage bonds and corporate bonds are issued in a less standardized fashion and thus are harder to hand over to computers.

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The fastest changes are happening on the desks where JPMorgan's Q.M.M. is spitting out prices for interest rate swaps, which are derivatives that allow borrowers to guard against future changes in interest rates.

The Dodd-Frank financial overhaul legislation required that most types of swaps move onto new electronic trading areas known as swaps execution facilities, or SEFs. The move is not taking place all at once, but about 20 percent of all trading of interest rate swaps is now automated, up from 2 percent a year ago, according to JPMorgan.

As the market changes, humans won't become obsolete. Q.M.M. is monitored constantly by a person who makes sure that the prices it delivers make sense. And another trader takes the Q.M.M. prices as a starting point for larger trades.

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The increasing automation of all of JPMorgan's fixed-income desks is overseen by a newly promoted executive, Frank Troise, who oversaw electronic stock trading.

Mr. Troise is trying to make sure that JPMorgan's size doesn't hinder it from taking the kind of risks that are necessary in evolving markets. The bank is involved in experimental efforts like Project Neptune, a collaboration among financial firms aimed at making it easier to find specific bonds electronically.

That will involve failures along the way when some markets don't evolve as expected. But the bank will have to keep trying because Mr. Troise and his colleague Mr. Rohrbaugh said the one certainty was that the markets would change.

"You are going to have a fundamentally different landscape in two, three and five years from now," Mr. Rohrbaugh said. "Our sales force and our trading businesses fundamentally will have to adapt to a new way to engage clients."