One of the positive outcomes of the new mandatory reporting regimes will hopefully be a significant improvement on the quality of big data, better visualisation tools and more informed decision making. We already see automation tools based on varying levels of third party statistical data, some with stochastic broker selection. Most automation tools would still be “exception based” so if the order doesn’t meet the “normal” criteria, the system will forward the order for human intervention. We are excited to hear about the progress of “exceptions based” technology as it frees up time for the buy-side trader. To what extent this evolution will lead us toward the purest definition of Artificial Intelligence (AI) is still to be proven. Our definition of AI suggests that the machine will question and propose to override its policies programmed by a human when it finds a better way of doing things. We understand that activities that overrides policies are still better suited for the human trader.
We expect the interest in the Algo Wheel type of technology to increase not only within equities trading but we also see the interest within foreign exchange trading. The interconnectivity of smarter TCA technology and independent third-party data will support the automation and randomisation of broker selection to remove human bias. Ultimately it will require a smarter broker review and classification process. Within equities, the buy side will need to understand who are their range of preferred brokers within each strategy. Within foreign exchange, the buy side are discussing the future of classifying counterparties based on their performance within currency pairs. More buy side are now evaluating if they should start using foreign exchange trading algorithms for Spot and derivatives.
The fixed income trader will be more interested in statistical evidence based tools that visualise historical counterparties of ISINs to minimise the footprint and market impact. We have already heard one buy-side success story with full automation of bond trading of highly liquid government bonds. We are eager to hear more stories like this in 2018.
The discussions about pre-trade pricing tools within the equities ATF highlighted the consensus that technology can be useful up to 10% or a maximum of 20% Average Daily Trading Volume (ADV). The machines are still not smart enough to replace the human intelligence of the sell-side trader.