By automating certain equity trades, we can improve efficiency, increase speed to market and further optimise counterparty selection.
Many people who do not work in finance may imagine traders to be like the figures in the 1987 film Wall Street, shouting at each other and gesticulating wildly on the trading floor as they seek to place orders.
The days of buying and selling equities under such circumstances are now almost entirely over, having been replaced by computer-based trading, which is faster, cheaper and more efficient.
But in front of each computer still sits a person who continues to oversee the execution process. At LGIM, we have developed our technology in order to automate some of our trading in cash equities – effectively creating a ‘no-touch’ process for these trades.
If a portfolio manager raises orders in our order management system that meet certain criteria set by the Global Trading team, the execution management system automatically routes those orders into a pre-selected algorithm for execution. Previously, under a manual process, taking these trades from inception to market could take up to 10 clicks of the mouse. Through automation, we have reduced this number to zero.
We have identified three key benefits to this new approach: improved efficiency, greater speed to market and enhanced counterparty selection.
In 2017, we executed more than 460,000 trades in equities – a number we expect to grow in 2018. We need to be efficient to meet this demand, whilst staying competitive.
By automating the relatively small and straightforward orders, we save many hours of labour a year – which we direct instead to larger and more complex trades. We believe this can add significant value for our clients.
Speed to market
Automation enables us to significantly improve the speed with which we can bring trades to the market. Reducing the time it takes between raising and executing orders allows us to extend our potential trading window. More time can help to optimise bid-offer spread capture, which often has a positive impact on trading costs.
Automated trading can also help us to further optimise the broker selection process for ‘low-touch’ trades. Using a rich, historical data set, we can be more scientific in our approach to determining which counterparties to trade with, allowing us to systematically reduce the risk of any human bias creeping in.
I should add that we have a robust framework around all of our trading activities, including those that are automated. We also have a dedicated internal trading research team to help us analyse our data, and ensure the efficacy of our approach. Ultimately, the Best Execution Committee scrutinises and challenges the execution quality we deliver.
We are automating other areas of trading, in addition to equities. In a future post, I will look at how we are doing this in fixed income trading. And of course, the process is also illustrative of the dramatic technological advances underway globally – covered by our long-term thinking – that are changing the ways in which we interact with one another and swaying consumer demands for products and services.
The battleground was set. Lowest price prevailed. Market share was taken. The discount model has thrived. Yet, as the fight over the retail endgame continues, are the disruptors now set to be disrupted?