Embracing the Machines: Semi-Automation Gains Traction on Buy-Side

MARX has been delivering this capability consistently for over 8 years. Is it the perceived expense vs. reward that has prevented the buy side from adopting these processes sooner? MARX is priced affordably for any size brokerage or professional trader.

Traders Magazine Online News, December 5, 2016

RJ Weiss

As the buy side does more with less, more routine order flow is being delegated to automated channelsfreeing traders up to focus on more complicated transactions. Now that the machines have proven their worth, they are being assigned more complex trading tasks. The remaining challenge for the buy side is finding a balance between trade ideas that require expert human intervention and orders that can be outsourced to trading systems for execution.

What does order automation look like?

With trading technologies more sophisticated than ever, buy side traders are entrusting their trading platforms with a wider range of execution objectives. It used to be that algorithms and other forms of automated trading were used for only the most basic order types. Nowadays, if an order is sufficiently within a firms risk parameters or representing a negligible portion of ADV, it is likely that at least some part of that process will be delegated to a trading system to determine the implementation strategy.

Why now for order automation?

Order automation has been available for years, but only recently has gained significant popularity. This move to automation technology is due to improvements in basic trading systems reliability, as well as improved systems integration introducing advanced risk and transaction cost analytics to a traders desktop. This combination of near-guaranteed systems uptime and integrated analytics is the foundation of effective, sustainable automation rules.

However, this level of comfort did not happen overnight. Automation needed to overcome a pervasive man vs. machine rhetoric, in which buy-side trading systems were historically viewed as burdensome even in their most basic form, and unworthy of acting without cueing at each step.

Who is adopting automated workflows?

Every firm, regardless of size or mandate, stands to benefit from order automation. In addition, the pressure on the buy side to create operational efficiency and do more with less is nearly universal. Order automation is a natural response to this demand.

Order automation for startups and smaller firms is an easy match. As an industry, we are seeing startups launching with less capital and boutique firms attempting to maximize their idea generation resources without over-expanding their operation. Despite this handicap, smaller firms are still expected to have the necessary systems in place to be able to deliver best execution to their investors. This leaves smaller firms eager for systems to level the playing field between themselves and established players with far more resources.

Quantitative firms have embraced order automation more than any investment management segment. In some cases, a quantitative trading operation is almost completely abstracted into an automated, systems-related task. Automation not only assists strategies with time-sensitive indicators, it also helps sort through large quantities of trades to halt difficult, outlier transactions for quant portfolio managers to further review.

And even amongst the largest players, there is a belief that in order to be profitable, funds need to be operationally nimble and cost efficient, devoting their manpower only to trades that could really destroy alpha if not handled correctly. Risk-based order automation decisions help these institutional teams focus on the most important trades.

Whats next?

So now that firms are more comfortable delegating order flow, we begin to see semi-automation take root in the industry, where trades have varying degrees of human and electronic involvement. Indeed, as systems mature, traders are taking a closer look at all steps in the trade lifecycle to see which repeatable tasks may be absorbed into their trading system.

Look for the years ahead to bring a spate of smarter trading platforms designed to identify and address these types of workflow efficiencies. These platforms will help firms boost their productivity by focusing their attention where it is most needed.

RJ Weiss is a Director in the Workflow Technology group at ITG.

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