Fund managers seek alternatives to automation


The conventional wisdom holds that algorithmic and automated trading techniques in general have become commonplace as the industry responds to cost imperatives and the need to compete with the big boys of the HFT era.

But anytime you discuss this, a few will always point out the need for high-touch trading to handle some situations. For example, in the wake of the Knight Capital software implosion, which cost the firm roughly $450 million in less than an hour, some were quick to raise the notion of more human involvement and less automation.

MathWorks has released an interesting study showing that "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,' " as noted by Reuters.

That mindset is less prevalent on the sell-side, where 67 percent of investment banks are aiming to increase their use of automated trading techniques. In the end, the buy-side will continue to cautiously deploy more algorithmic techniques when appropriate and stick with human-based trading for special situations.

You would have to think that the general trend toward more automated trading in most markets, even the bond market, remains intact, though we'll never get to a point where all trading is automated. In fact, for the time being there are lots of pockets of trading that will rely on humans for many years to come.

ICAP, for example, the currency interdealer broker, has signaled its intent to crack down on various HFT practices in ways that might underscore the significance of human trading. Another example might be the market for bespoke credit derivatives.

While portions of the credit derivatives market will migrate to more electronic venues over time, some tailored products just don't seem like a good fit with automated trading. In the face of extinction, the humans will likely prove resilient.

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