29 March 2023
It is safe to say that trading systems worldwide have changed dramatically over the last 50 years or so. The Internet has been critical to these changes prompting a period of minimal human intervention and ever-quicker trading systems, but these have often encouraged more volatile markets. So, what are the pros and cons of low-touch execution and leveraging technology?
This is a term used to describe automated trading systems where human interaction is minimal. Trades are routed via electronic systems, giving investors direct access to investment markets. There are several benefits to low touch execution services such as:-
Speed is of the essence when it comes to trading, the opportunity to react quickly and be one step ahead of your fellow traders. When looking at speed, you will often hear the term latency discussed, which reflects the time taken for trading data to be passed between two points. Whether or not we are at the extremes of latency, with minimal opportunities for further reductions, remains to be seen.
Opinion is split concerning automated trading systems, which are effectively the high end of low-touch trading. The use of algorithms can create waves of selling and waves of buying which can instantly move markets. However, on the plus side, this has opened up considerable opportunities to trade on moving trends, often in a split second.
Historically, the most significant cost associated with investment trades was the time taken by humans to receive, carry out and settle transactions. The introduction of technology has automated many of these processes with low-touch execution services leading to lower trading costs. Many of these have been passed on to investors, providing a long-term boost to their returns.
While there is no doubt new technology has had a hugely positive impact on trading services, there are some issues tomonitor. These include:-
Whether through trader error or bugs in an automated trading system, it is essential to have a checking system in place before trades are executed. In a split second, with no time for changes or review, a trade can be completed, which may need correcting. While not often, there have been instances where the decimal point in automated trading systems has been misplaced, having a potentially detrimental impact on the wider market.
While manipulation is a concern with regard to automated systems, the transparency of trades and the strength of compliance today make this more unlikely than you might think. Where rogue transactions have been inputted, whether intentionally or by mistake, the authorities are quick to respond, take action and often issue fines. Even though this is an area of concern, in reality, the number of parties attempting any degree of market manipulation is minimal.
As we touched on above, compliance has and continues to play a significant role in both investor and automated trades using low-touch execution services. We now have market breakers, controls on automated trading, enhanced trading transparency and a regulatory service that constantly monitors market movements. While we have seen massive investment in trading systems, the authorities also continue to invest heavily in compliance which is crucial to market confidence.
There are two extremes when it comes to low-touch executionservices, those which connect traders with markets and those which facilitate automated trading using algorithms. Automated trading can be controversial and is often accused of squeezing market trends into an ever smaller timeframe. However, regulators are very active in this area. Regulation is critical in retaining market confidence which, as we have seen numerous times, is crucial to maintaining efficient markets.
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