Automated trading systems offer benefits across the whole lifecycle

July 5, 2024

Key Takeaways

  • Automation offers speed, consistency, lower costs, fewer errors
  • Full-fledged solutions need to deliver across the whole lifecycle
  • Vendors must provide customized and off-the-shelf solutions

Automated trading and algorithms do the heavy lifting on trading desks, improving efficiencies by eliminating the need for manual interventions in basic tasks. The benefits of using the latest technology are plentiful, but knowing which operations to automate and the right solutions to deploy can prove challenging.

Speed, consistency, cost-cutting

For broker-dealers, equities automation enhances trading performance, strengthens best execution, and allows traders to manage more orders across a wider range of markets.

It also enables standard processes to be carried out consistently, ensuring a reliable and uniform service for customers and minimizes manual errors, such as ‘fat finger’ mistakes.

By automating routine tasks, firms can free up staff and allow them to focus on strategic decisions and client interactions, save on labor costs, and improve efficiency.

Moreover, automated trading systems can be programmed to comply with laws and regulations, provide detailed audit trails, and enable real-time monitoring of market conditions and trading activities.

They also facilitate market integration, allowing for access to multiple exchanges and trading venues simultaneously. Deploying automation allows for flexible adaptation to new trading strategies or market conditions, enhancing data analysis and decision-making.

Key areas of automation

Automation should be tailored to the specific needs of each trading desk, taking into consideration individual decision-making procedures and criteria. Here are some areas that benefit:

In order handling, automated order execution, routing, and booking can significantly improve efficiency, allowing traders to focus on more value-added tasks. Automated order handling includes bundling separate buy-side client orders before taking them to market, routing and splitting order to appropriate execution services, and automating the scheduling and execution of tasks, like completion. Automation can also assist with the process of finding liquidity, placing orders across multiple markets in series or in parallel.

When it comes to quote management, automation can streamline quote generation, pricing, and management.

Automating order-related messages, notifications or invitations to counterparties is another area where automation can enhance efficiency and timely communication. Order management systems (OMS) automate order processing, including messages like Indications of Interest (IOIs) or Trade Adverts, ensuring timely and accurate communication with counterparties.

Challenges and pitfalls

With all of automation’s benefits for broker-dealers, one must also be aware of the associated costs and required resources.

Choosing which operations to automate can be challenging. One must assess whether the savings and advantages will outweigh the expenses of developing, testing, and implementing an automated system.

Some processes that could most benefit from automation are unique and firm-specific. In such cases, off-the-shelf solutions may not be suitable, and creating one’s own solution requires knowledge, time, and resources. Furthermore, developing a solution always incurs an opportunity cost, given that a company’s resources could potentially be more effectively deployed elsewhere.

Code-based automation delivery may be very resource-intensive. Handling real-time events requires an understanding of ‘state machines’, including modelling techniques used to represent and manage a system’s different states and transitions. Few brokers currently have this level of in-house expertise.

Automated processes can minimize one-off manual errors, but if errors do occur, the consequences may be far worse. An error can be due to uncommon “edge cases”, scenarios that lie at the operational extremes of a system, such as executing multiple conflicting orders at the same time. This is increasingly a concern for regulators – for example, in Europe, the MiFID II RTS 6 standards mandate annual stress testing for trading algorithms to identify such issues. The costs of carrying out such testing need to be accounted for when planning new automations.

What automation needs to deliver

Full-fledged automation solutions need to be agile, capable of delivering across the whole lifecycle and across different regions and be able to flag the need for human intervention.

Flexibility is one of the necessary core features: the capacity to automate the entire order and trade lifecycle from order placement through confirmation and settlement. Technology can support flexibility via a modular architecture approach, a method that breaks down a system into smaller, independent components. These modules can then be independently built and tested without impact on wider systems.

Automation solutions also need to be agile to swiftly develop, test, and implement automation. Low-code or no-code interfaces allow for a quick and inexpensive way to create, test, and implement automation using data or configuration settings.

Monitoring and exception handling are another core requirement: they allow for the easy supervision of automated processes and for flagging exceptional cases where human intervention is necessary.

Automation must also be able to deliver globally. This requires understanding the unique processes and requirements of each market and region and the ability to customize automated processes to apply this knowledge.

Another prerequisite is using a common technology framework, which enables faster development and the efficient deployment of automation across various business segments.

Customization brings further benefits

Products that automate core tasks allow brokers to generate more business and consistent results, which, in turn, gives them a competitive advantage.

Additional advantages come from the ability to develop customized automation, either by brokers themselves or in collaboration with technology partners. However, to control costs, customized automation must be delivered swiftly and flexibly.

And vendors must ensure that their products support both readily deployable customized automations and off-the-shelf automation.

ION Markets

Don't miss out

Subscribe to our blog to stay up to date on industry trends and technology innovations.