Building a better kill switch

Tools

You know you've been around the block a few times when a Reuters story makes you laugh outloud. Did you guffaw too when you read this?

"Almost a third of fund managers believe automated trading has had its day and are considering a move to alternative trading methods, including a return to 'human-led trading models'", a study released on Monday showed.

Ah, "human-led trading models." In other words, some battle-scarred fund managers and portfolio jockeys are re-thinking their reliance on complex algorithms to make trades. If this Mathworks survey is true or decently reliable, then this is quite the philosophical turnaround from a short decade ago.

In the last 10 years, automation and electronification conquered trading as quickly as the iPod killed your Sony Diskman. Trading firms large and small hired quantitative mathematicians or quants - the Jedis of numbers - to devise smart formulas to execute trades in a split second. In the same time it takes you or I to scan an Excel spreadsheet, an algorithm could buy 10,000 shares of Dell on the NYSE and dump them on the LSE with time left over for another mammoth trade. "Welcome to the future," we were told. Along with "Oh, and say goodbye to most of the trading desks."

Fast-forward to this year when we saw a mismanaged Facebook IPO (nice one, Nasdaq) and a runaway algo that couldn't be undone in time (well played, Knight Capital), and here we are. According to a recent Mathworks survey, fund managers want more human intervention over trading.

"The buy-side's (fund manager's) attitude to automated trading is partly a reaction to the commoditisation of trading access and reflects the preference clients have for good investment ideas ... over electronic trading capabilities," said Steve Wilcockson, a manager at MathWorks, a report from Reuters. (To be fair, 67 percent of brokerages and investment banks are looking to increase the use of automated trading, according to the same findings.)

So, will this desire for slower, more hands-on trading take hold? It just might. After the headlines of flash crashes and unreadable market volatility, some investors might not need the fastest, most instantaneous way to trade. Clients might want more control. As they are wooed by broker-dealers and hedge fund managers, clients might want to ask something no one really thought when everything became electronic 10 years ago: Is there a human being watching over these trades who can stop them in time if they go haywire?

In other words, will there be a kill switch?

While investment banks are laying off IT workers in droves, they might want to keep a few propellerheads onboard or hire them as consultants for one last ganrd IT project. What high speed traders need is greater transparency into the trades and a foolproof kill switch to stop runaway trades. Sure, bandwidth and low latency will still be important when a firm needs to execute a trade under a second but hedge fund managers will need to see all of their data and know that if they spot something squirrely - an algorithm that has gone off the rails - they can stop the trade before they lose everything.  

Now that's an IT vision for the future.