Since the early 2000s, we’ve seen a huge shift towards the automation of global trading. Physical trading floors and even telephone trading have become obsolete in many areas, reducing the human involvement from brokers and giving way to more efficient electronic routing of orders to the market and through to processing. However, despite the enormous increase in efficiency and cost, buy side traders are considering the merits of returning to a more involved service with greater contact with their counterparties in certain situations.
The Pitfalls of Electronic Trading
The concerns voiced included situations where the ‘low touch’ approach isn’t so effective, for example where continued low volumes were making the filling of orders more difficult to accomplish. The threat of losing out to High Frequency Trading (HFT) activity is great enough that firms are starting to want to have more knowledge about who they’re dealing with before they trade. That brings them back into the realm of high touch trading, where everything revolves around developing and managing relationships between counterparties, and building contacts for future business. Essentially this is fostering the same kind of relationship management a traditional broker would have with their client. So if the concerns are that great, what place does low touch trading have?
Alternative Solutions
The explosion of social media usage has completely changed the way people are communicating and sharing information online. Relationships are being developed and maintained electronically, with users able to expand their circle of contacts through existing contacts. By combining the advantages of social media with the numerous electronic trading platforms that are used throughout the industry, counterparties can circumvent the pitfalls of electronic trading. MarketBourse looked at one point like it would be the right solution. It would have allowed traders to select ‘friends’ from circles of market participants, not unlike the friends model used on various social networks. While it was set to launch in 2013, regulatory factors eventually caused the project to be put on indefinite hold.
Tony Mackay, the man behind the social media style trading platform, explained at the time that with various impending changes in the regulatory environment, the timing wouldn’t have been right for MarketBourse.
Reactions were of disappointment. Scottish Widows Investment Partnership’s head of dealing, Tony Whalley, said that the concept of overlaying a social media style communication network over the current methods and processes of electronic trading had generated a lot of interest from buy-side firms, who wanted greater flexibility and protection against high frequency trading strategies. He added that it would have made a great deal of sense for the industry.
The balance between market regulation and ease of conducting trades and business has always been difficult to achieve, and when an innovative new method in the process appears, adapting market rules can be a significant challenge.
But as Whalley pointed out, regulators should make sure that they can implement market rules that will support and promote innovative concepts in the future.