Rise in Automation Proving Costly for Some Firms, Finds Report
The rise of automation in trading, and incorrect decisions made by computer programs, is beginning to prove costly for some firms in Europe, according to a new report.
The study, conducted by the Economist Intelligence Unit, a U.K.-based business research organization, found that over a third of European financial services firms surveyed had lost money at least once in the past six month due to automated decisions made by computer programs. While over 30% said that they had lost customers in the same period as a result of an automated decision.
Technological mishaps in capital markets are high on the agenda at present following on from a series of high-profile trading snafus in the last 12 months, the most notable of which was when Knight Capital suffered a near-catastrophic software malfunction in August, which saw the U.S. market maker lose $440 million in just 15 minutes of trading.
“Trading technology has come on leaps and bounds; it has become a lot easier to put an order into an algorithm,” said Michael Horan, director and head of trading services at Pershing, part of custody bank BNY Mellon’s empire.
Although the survey found that financial services executives recognized the business value automation can add, another problem brought about by dealing with technology was the challenge of connecting systems with each other.
“Automated processes can bring significant benefits to the financial services sector and, while technology may provide high intelligence, it is essential that the processes are reviewed and updated regularly by humans to ensure compliance with regulations, and that security standards and efficiencies are maintained,” said Rick Hewitt, finance director at technology provider Ricoh UK, which commissioned the Economist Intelligence Unit report.
Hewitt added: “Keeping up with the pace of technology change and ensuring ongoing connectivity across systems isn’t easy. We know that technology is evolving more quickly than the processes or ways to use it. To successfully create connected systems, the financial services sector should focus on process optimization and make changes to traditional ways of working.”
This rise in automation has left some in the industry, including institutional buy-side traders, fearing that the markets are currently under-regulated.
“There is a perception that market structure is flaky and there is not enough governance around trading,” said Paul Squires, head of trading at Axa Investment Managers, a French-headquartered institutional investor, earlier this month.
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.
The MOU covers certain security-based swap dealers and participants.
Equity underwriting on European exchanges rose 70% in the first half.
The analysis is based on transactions publicly reported by 30 European APAs and venues.
A similar service is available on the BIDS platform in the US equity market.