31 May 2021
The shift in the equities market towards complete electronic trading has been gathering pace over recent years. Low touch trade execution combines the speed and efficiency of electronic trading with the service and oversight of a high-touch trader. This speed is helping to shift and broaden trader expectations and is being made possible by quickening technological advances.
This shift towards rapid, electronic low touch trading helps to make low latency trading more achievable. As a result, trading can become more efficient.
How does low touch trading compare to the traditional high touch approach, and what are the advantages and disadvantages, particularly in relation to market impact?
High touch trading was often an opaque process for the client. Carried out by human traders, there was often the potential for high latency and, although rare, human error. Because there was no way for clients to keep track of how the broker dealt with their order, there could be room for mistrust and misjudgement.
A typical high touch trade execution had the advantage and disadvantage of using a trader’s judgment, professional networks, personal biases, and experience. Find a skilled trader with a depth of market knowledge and an extensive network to call upon, and the relationship could be a beneficial one.
However, high touch manual trading does carry a much greater risk of higher slippage and market impact. High touch trading often makes good sense for illiquid stocks. For stocks that are liquid and have a high turnover, the speed and efficiency of low touch trade execution have removed some of the drawbacks of the traditional manual model.
Low touch trading reduces the potential for significant market impact. This is the change in the price of an asset caused by the buying and selling of that asset. When the asset is in demand and being bought, the price will increase. When it’s being sold, the price will be driven down.
Trading any asset can also spark an interconnected push on the prices of other assets. This is known as cross-impact.
Low touch trade execution can help to minimise the market impact caused by trading an asset. Trading algorithms are continually evolving and are increasingly designed to optimise the rate at which trades happen to reduce market impact and minimise volatility risk.
Rather than being executed in one go, larger trades can be broken into a series of smaller trades. This increases the risk of the market moving against them while trades are being executed. However, the risk with low touch trading is considerably less than if a similar approach was used during high touch manual trade execution.
A shifting regulatory environment, the speed of technological change, and increased buy-side expectations mean that trade will continue to shift from high touch to low touch over the coming years.
At Global Investment Strategy, our innovative, technology-led, low latency, trade execution services provide our clients with the best execution solutions that enable them to achieve enhanced returns.
Our execution-only brokerage services ensure that your orders are completed in as timely a manner as possible.
Call +44 (0)20 7048 9440 or email email@example.com to find out more about Global Investment Strategy and our low touch services.Back to News