Trading places: How automation technology is changing the trading floor

By Bob Santella | 6 March 2017

Bob Santella, Head of Global Trading’, Institutional & Wholesale, FIS

The cash equities trading desks at large banking firms were once manned by hoards of staff. But increasingly this is becoming less so. Within this, there is a telling story that highlights the extent to which technology is fundamentally altering the face of trading against an unconventional market backdrop. As investment banks continue to trim overheads amid a market characterised by negative rates and strict capital requirements, efficiency gains from automation have become an industry must; particularly amid a volatile regulatory environment that has driven a rise in compliance costs.

One doesn’t have to look far afield to find further examples of technology’s impact on the sector:  One top banks’ new consumer lending platform is entirely run by software, with no human intervention; another’s new electronic platform for the secondary trading of syndicated corporate loans moves away from “voice trades” and with all trading set around a fixed mid-market price, removes the need for negotiation, pairing buyers and sellers “without friction."

This is not to say that robots are taking over. There is a long way to go before that happens and we see automation augmenting and complementing rather than replacing human ingenuity. They are examples that make it abundantly, however, clear why 87 percent of respondents to our recent survey of 464 sell-side executives said that their business is becoming “technology-driven”. Looking ahead, commercial banks, investment banks and broker dealers all look set to continue to invest to ensure their competitive edge; 75 percent of our respondents said that they hope to use automation to drive savings across the front, middle and back offices. 

According to the survey, the most compelling trend for the sell-side is improvements in execution technology – for example changes to algorithms, or direct electronic connections to exchanges or other liquidity venues. The second biggest trend is multi-asset capability. This can mean more of the base commodity, or it can mean providing more complex products with higher margin. The added-value factor of this is obvious; by expanding the number of markets your customers are exposed to as well as the products you make your customers “stickier” and produce more revenue from them.

Traded markets like currencies and futures that are not traded on an exchange face increasing automation as well. Although the role of sales trader in fixed-income and equity trading desks will continue to be critical to serving clients – whether they prefer high-touch or low-touch trading services – their sales desks will be leveraging more and more technology to better understand their customers’ portfolios, trading habits and profitability. They will also be using increasingly powerful tools to systematically and consistently answer three simple questions across asset classes, execution and clearing platforms (as well as global regulatory regimes): Who can I trade with; what can I trade with them, and where can I execute and clear this trade?

These seem deceptively simple. In a rapidly evolving regulatory climate however – with President Trump signing an executive order for review of the 2010 Dodd-Frank Act and Brexit posing a number of unknowns about the future regulatory climate of the City – ensuring they can be answered and the trade executed rapidly is absolutely crucial to ensuring that competitive edge.

Many areas of regulation cause the sell-side industry concern, ranging from trade transparency and changes to tax codes to capital requirements and differences between domestic and global rules, to name only a few. Alongside concerns around data privacy, they hint at the variety and scale of regulations that firms have to comply with and prepare for. Again, technology has the potential to help with automatically repurposing and repackaging data as it is needed across heterogeneous jurisdictional requirements, freeing up valuable “human time” for value-added tasks.

Amid these evolving regulatory requirements and reporting rules, financial institutions continue to be challenged to transform their mission-critical operations infrastructure. At FIS one of the focuses is supporting an increase in cross-function automation, reduction in total cost of ownership and improvement in risk assessment with integrated solutions for corporate actions, reconciliations and collateral management, that allow quicker completion of high-volume, complex reconciliations, while maintaining profitability in light of stringent collateral requirements and reduced commissions.

Even a cursory glance at the market underlines how fast things are moving. Companies developing proprietary algorithmic and transaction cost analysis (TCA) services are making them available not just to asset managers but to all subscribers – who receive automated reports upon completion of their orders showing the algorithmic execution performance versus arrival price and a range of benchmarks calculated by the platform every millisecond. Other areas that we see developing rapidly are data-visualization tools that draw on macro, fundamental, social and proprietary data across asset classes to inform front office staff.

The resulting ability for companies to delegate time-consuming data analysis, whether across the front, back or middle office, to automated processes is priceless. This allows for the skills no machine will ever replace – truly creative thinking and relationship building, to name just two – to come to the fore, while allowing the industry to reduce its overheads and improve its security in an increasingly competitive world. 

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