Global Investment Strategy | Global Financial Services

In today's fast-moving financial markets, low-touch execution has emerged as a favoured strategy for executing large trades with minimal manual intervention. However, in volatile markets, where rapid price fluctuations and liquidity constraints are common, balancing low-touch execution with robust risk management becomes crucial. In this article, we will look at how investors can navigate these challenges to protect their portfolios.

Understanding low-touch execution

Low-touch execution uses the benefits of algorithmic trading to automate order execution, minimising the need for human intervention (and mistakes). As a product of ever-evolving technology, it is understandable why this type of trading is becoming more popular, offering speed, cost efficiency, and scalability.

This makes it particularly attractive for high-net-worth investors who tend to take a more hands-on approach with their investments. Unfortunately, in volatile markets, where prices can shift dramatically within seconds, the rigid nature of the algorithms can be counter-productive, often introducing an enhanced element of execution risk.

Managing volatility and liquidity risks

Any time volatility occurs, it introduces additional, often significant, risks into general portfolio management, specifically with low-touch execution. This can result in delayed trades and slippage, where the final execution price can frequently deviate from the expected one.

These risks can be exacerbated by liquidity issues, particularly when dealing with large orders in thinly traded markets. If not managed correctly, a large trade has the potential to move prices, increase the cost of execution, and potentially lead to unfavourable outcomes. In some cases, mismanagement of a large transaction can leave the majority of the trade unfulfilled, and the client left with a relatively minor holding.

Strategies for risk management

When it comes to managing risk with low-touch execution strategies, there are a number of factors to consider:-

· Portfolio rebalancing is essential to ensure that asset allocations remain aligned with risk tolerance, especially during periods of high volatility.

· Position sizing should be adjusted to minimise market impact, and adaptive algorithms that respond to real-time market data can help mitigate execution risk.

· Additionally, incorporating dynamic stop-loss strategies allows for automated adjustments to changing market conditions, offering a safeguard against unexpected downturns.

While each of these risk management strategies is valuable in isolation, the combined benefits can significantly improve long-term returns.

The role of technology in enhancing execution risk management

We all know technology is crucial in investment, especially when optimising low-touch execution and managing the associated risks. Advanced trading platforms equipped with real-time data analytics enable more precise and responsive execution. Then, we have AI-driven tools that can adapt to market conditions instantly, reducing the likelihood of execution errors during volatile periods. These technologies empower investors to maintain control over their trading strategies, even in challenging market environments.

The long-term benefits of AI-driven investment strategies may be diluted somewhat as regulators continue to clamp down on this type of activity. It will always have a place, but the initial benefits over traditional methods may not be as great going forward. There are also serious concerns that AI-driven investment could lead to self-fulfilling prophecies and ever-growing instances of effective market manipulation/abuse.

Case study: Covid 19

If we look at the market turmoil during the onset of the COVID-19 pandemic, this was a perfect example of volatility spikes and liquidity drying up in many assets. As a consequence, investors who had integrated adaptive algorithms and dynamic risk management strategies into their low-touch execution processes were better positioned to navigate these conditions. Unfortunately, others often faced significant execution challenges.

Conclusion

While low-touch execution offers numerous benefits, particularly in terms of efficiency and cost, it must be carefully balanced with robust risk management, especially in volatile markets. By leveraging technology, adapting strategies to market conditions and maintaining vigilant oversight, investors can achieve optimal execution while protecting their portfolios from undue risk. However, it’s important to adapt your approach with market conditions - not always easy!