In The Media

Embracing the Machines: Semi-Automation Gains Traction on Buy-Side – ITG’s RJ Weiss

December 07, 2016

As the buy side does more with less, more routine order flow is being delegated to automated channels—freeing 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 firm’s 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 trader’s 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.

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