New technology debuts on a near-constant basis and has impacted multiple sectors, including the financial world. The electronic trading industry has grown by leaps and bound over the last decade, leaving many people racing to meet the new demands. One area where these changes are very apparent is how low touch trading has evolved thanks to the introduction of algorithmic trading strategies. To effectively bring in this style of trading to complement your current high touch strategy, here’s what you need to know.
The evolution of LT trading
Previously, low touch trading had a straightforward workflow that was quite simple. The buy-side sent its order flow via direct market access (DMA) routes from the sell side. However, DMA routes simply didn’t keep up with the increasing complexity of trading and now are being replaced by more sophisticated algorithms, which are computer-run and designed to execute orders based on a set of parameters to reduce costs and boost earnings. This has improved the quality of execution and also transparency, which has put more control back into clients’ hands in return.
Trade cost analysis to the rescue
For brokers, staying in step with such significant workflow changes was no small task, as staying competitive requires a thorough analysis and close scrutiny of client orders. This is where trade cost analysis (TCA) has been instrumental; it has shaped the ways algorithm order flow is managed. These days, many trading institutions use these systems to recreate workflows, which allows them to evaluate their trading network and execution quality on a system basis. The results give firms valuable insight they can use to gain an edge and avoid past mistakes.
Gaining excess returns on investment over the benchmark index is the goal of all firms, and low touch trading can help in this area because the transparency and level of detail are much greater here than in high touch trading, where human errors can make it difficult to perform an accurate analysis. This type of algorithm trading uses distinct parameters that are trackable over the entire life of an order, so strategy performance can be somewhat standardized to determine the best execution. Firms that disregard the value of TCA with this type of trading may be losing out on a revenue stream to complement their high touch side.
To take advantage of these new trading opportunities, firms need to give their clients an array of algorithmic trading strategies that produce executions that are both reliable and cost-effective.
Rising to meet these new challenges in a highly competitive market can be daunting at times, but finding the path to success is possible. Ultimately, it will require differentiating the strategy offerings and maintaining flexible, sophisticated technology that is able to handle a wide range of objectives from clients. Stay on top of the latest news and developments so your firm is at the head of the line and not scrambling to catch up with the competition.