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Reinventing Trading Venues: How AI Can Help Create a More Efficient Market

Traders Magazine Online News, January 15, 2019

Robert Hegarty

Why have the equities markets – and equity trading venues in particular – been among the last to employ some of the most exciting, promising new technologies introduced in the last 25 years? With the rapid advancements in technologies like Artificial Intelligence, Machine Learning, cloud computing, etc., why has no one redefined the equity trading markets around any of these technologies?

AI is well suited to disrupt the status quo in equity trading venues because of its particular – and unique – market structure: readily measurable performance, well-defined investor objectives, a large number of transactions, highly commoditized nature of current platforms and it’s history of accepting technological disruption. These characteristics make now the time to bring advanced technologies like machine learning to equity trading venues. It’s time for a “smart venue.”

Focusing Venues on Investors’ Objectives

It’s time to align the liquidity pools with institutional investors’ trading objectives. So, why aren’t these objectives already aligned? The Trade Magazine answered this question last year when they asked institutional equity traders their reasons for using algos, which is a direct reflection of what is most important to those traders. As shown in Exhibit 1, When executing trades with their brokers, the top three objectives traders cited were:

1.            Consistency of execution performance

2.            Reducing market impact

3.            Increasing trader productivity

While the top three objectives have always been important for traders, each of these top three objectives have increased in importance in the last three years.

“Reducing market impact” has been at or near the top of these objectives in each of the last three surveys, while “Consistency of execution performance” has grown the fastest in importance and taken the top spot in the most recent survey. The venues, however, have not systematically focused on these objectives – modern AI now makes it possible.

Using AI to meet investors’ objectives

In light of the survey results in Exhibit 1, for buy side head traders the question now becomes, “How do I reduce market impact, in a consistent fashion, and increase trader productivity at the same time?” Could part of the answer lie in finding a venue that has the same objective and uses advanced technologies to achieve that objective? An efficient market engineered to minimize market impact? 

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