Part III
Most firms are on the road to automation and have tackled the low hanging fruit. The challenge now is to figure out which other trades can be automated and how best to go about address them.
Heads of trading see rule definitions and performance evaluation as areas they need to focus on to improve their trade automation workflow. Having a strategy to increase the percentage of orders automated is mentioned less often but rules and evaluation should be underpinned by a coherent strategy, rather than be tackled piecemeal.
Pre-trade analytics give the machine the data points that traders have when executing orders. These analytics can be used to provide, for example, an idea of the stock profile, pre-trade cost and expeected market impact the order will have. Applying appropriate weighting to the most relevant inputs in real-time ensures greater accuracy and a more tailored execution strategy can follow.
Most believe that pre-trade analytics have the potential to increase their desk’s percent of automated orders. Firms who do not utilize analytics will likely limit how far they can drive up the percentage of trades they can automate. Data shows leading edge firms are using analytics to push the boundary between low and high touch trades.
Transaction Cost Analysis (TCA) enables firms to evaluate the performance of trade automation post-trade and compare manual and automated trades with each other. Currently only a minority are using TCA to evaluate trade automation performance, but two-fifths intend to do so in the future. However, over a third have no plans at all.
TCA is an important tool for firms and four-fifths (80%) say it is important to be able to view their performance compared to their peers when using TCA analysis. Firms already use this technology to assess their traders’ performance and there is strong case for doing the same for the machine. Ongoing monitoring of execution quality will enable firms to continuously improve the automation process by comparing the performance of the rules against their benchmarks. It allows for experimentation and testing of new rules in a measurable way. TCA solutions are also vital tools for accountability, and the risk and compliance department for best execution reviews.