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Algo Trading Software and the Human Touch: Finding the Execution Sweet Spot

Traders Magazine Online News, April 2, 2019

Ahmed Heikal

For much of the past decade, market players have been focused on low-touch or no-touch execution solutions. As market electronification has taken off, quant funds and other proprietary trading firms have looked to automate most, and in some cases all, of their trading. The development of ever more sophisticated algo trading software bore out the wisdom of this strategy and you donít have to look far to find low-touch advocates.

Equities and derivatives trading have led the way, with electronification increasingly the norm. In the case of equities, where trading has become increasingly electronic over the past two decades, itís now even becoming common for buy-side players to look to build custom algorithms. A survey by Greenwich Associates late last year of sell-side executives showed they expected nearly half of their clients to ask for customised order-handling logic in the coming year.

But even fixed-income trading, which traditionally has been seen as a market that has required human judgment and discretion when it comes to trading, has become more electronic. A separate report by Greenwich, cited by Bloomberg, said 69% of trading in the U.S. Treasury market was through electronic platforms. And the Financial Times recently quoted the new chief operating officer at corporate bond trading platform MarketAxess as predicting an imminent surge of electronic trading in fixed income. ďThe level of automation will explode in the years ahead,Ē Chris Concannon, former president of Bats Global Markets, told the FT. In Europe, meanwhile, the best execution requirements in MiFID II are also pushing traders towards electronic trading.

Beyond automated trading

Still, while many firms may have grown comfortable trading on autopilot, there are times when a trader wants to step in and take control of the situation. It may have to do with orders of a certain size. Or it could be based on events when a market has become dislocated or an unusual situation has occurred. Even traders at firms that are heavily algo-reliant are bound to feel the occasional urge to make real-time decisions about how to get in, or out, of the market. Itís not just buy-side traders either. Say a broker has a position still open that hasnít been picked up by an auto-hedger. Relying on a GUI to tidy things up may be the simplest route.

Itís completely understandable. In fact, itís worth taking a moment to think about what algorithms are particularly good at versus the kind of tasks that humans can do better. Dr Hannah Fry, in Hello World: How to Be Human in the Age of the Machine, recently wrote of how superb algorithms are at prioritising information, classifying it, filtering it and finding links. But algorithms, she notes, have weak points. Understanding context is one of them.

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