by Kyle Pedrotty and Jay Hinton. 

Trade automation is the topic we get asked about most often lately. Firms want to know how we can help them address the fact that they have fewer traders handling more orders. But when we speak with traders, we hear their desire to increase automation—up to a point. Almost no one wants a majority of orders handled as “no-click” routing. Instead, all but the smallest orders take a “one-click” route, where the system pre-decides the relevant trade shapes and routes, then presents it to the trader to verify before being released to the market. Given the cost of errors, this is understandable. So how do we remove the need for that last click? The answer is by building trust in automation. To paraphrase, we need to empower traders to “trust, but verify.”

Creating trust requires systems to be transparent, reliable, and secure. Each of these requirements has aspects to explore. Systems that are transparent are both clear and auditable. Clear means the user can tell what the system is doing and it’s easy to tell where an order is located, how much has been executed, what strategy or method is being used, how much is being displayed and other critical attributes. It also means that the user can see what is going to happen next in the order lifecycle. The second aspect of transparency is auditability, ensuring that detailed order history is captured. Two hours, two months, or two years later when someone asks, “why did this order get handled a certain way,” it needs to be easy to answer. The ability to capture data, weightings, decision points, and relevant rules needs to be baked into system design from the beginning.

The next requirement is reliability, meaning a system is both robust and consistent. These are distinctly different. Robustness means that the system has a 99.9% uptime under both light and heavy order and market data flows, as well as low variability. No one trusts a system that bogs down when the market gets busy, or becomes unavailable at unpredictable times. Consistency means that for a given set of inputs, the system behaves the same way. If you give a process the same inputs, traders need to believe that the same outputs will occur.

The third and perhaps most important requirement for building trust is security. Traders need to know the system has guardrails and alerts. Guardrails place limits and checks on when automation can be applied, and when it needs to turn itself off. This means the system is dynamic, constantly monitoring market conditions, as well as being asset class-, region-, and product-specific. What works well for a large cap S&P 500 stock likely won’t work for a thinly traded Japanese commodity future. Alerts ensure that traders are prompted when guardrails get hit, when the system encounters problems, or when automation is being turned on or off for an order. Traders need just the right amount of alerting: informative and appropriate, and definitely configurable.

In short, building trust in trade automation systems requires the right technological approach, an understanding of the desk’s workflow, and the most precious element of all in a high pressure environment—time for traders to interact with the system to gain confidence in its capabilities.


Disclaimers and Important Risk Information

Charles River Development – A State Street Company is a wholly owned business of State Street Corporation (incorporated in Massachusetts).

This document and information herein (together, the “Content”) is subject to change without notice based on market and other conditions and may not reflect the views of State Street Corporation and its subsidiaries and affiliates (“State Street”).  The Content is provided only for general informational, illustrative, and/or marketing purposes, or in connection with exploratory conversations; it does not take into account any client or prospects particular investment or other financial objectives or strategies, nor any client’s legal, regulatory, tax or accounting status, nor does it purport to be comprehensive or intended to replace the exercise of a client or prospects own careful independent review regarding any corresponding investment or other financial decision. The Content does not constitute investment research or legal, regulatory, investment, tax or accounting advice and is not an offer or solicitation to buy or sell securities or any other product, nor is it intended to constitute any binding contractual arrangement or commitment by State Street of any kind. The Content provided was prepared and obtained from sources believed to be reliable at the time of preparation, however it is provided “as-is” and State Street makes no guarantee, representation, or warranty of any kind including, without limitation, as to its accuracy, suitability, timeliness, merchantability, fitness for a particular purpose, non-infringement of third-party rights, or otherwise. State Street disclaims all liability, whether arising in contract, tort or otherwise, for any claims, losses, liabilities, damages (including direct, indirect, special or consequential), expenses or costs arising from or connected with the Content. The Content is not intended for retail clients or for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulation. The Content provided may contain certain statements that could be deemed forward-looking statements; any such statements or forecasted information are not guarantees or reliable indicators for future performance and actual results or developments may differ materially from those depicted or projected. Past performance is no guarantee of future results. No permission is granted to reprint, sell, copy, distribute, or modify the Content in any form or by any means without the prior written consent of State Street.

The offer or sale of any of these products and services in your jurisdiction is subject to the receipt by State Street of such internal and external approvals as it deems necessary in its sole discretion. Please contact your sales representative for further information.