Automated trading encompasses a wide scope of practices, such the use of algorithms, statistical arbitrage and low-latency.

Buy-side head traders need to constantly remind themselves that while machines have taken over many of the tasks of humans, the markets remain essentially driven by people, not technology.

“If you start using algorithms that are supposedly responding in real time to the market you need to watch very carefully,” said Craig Jensen, principal and head of trading at Armstrong Shaw & Associates. “Automation is supposed to be a great thing, but there are areas where it does more harm than good. I’m not saying we have to go back to the way things used to be, but you have to find a happy medium. That includes a human element and an automated element.”

An overreliance on algorithms without proper oversight can lead to suboptimal results.
“One of the things I don’t like about algorithms is that when you’re trading, you see stocks start to flat line for the better part of the day,” Armstrong said. “People have plugged in a VWAP, TWAP, or another strategy, and can’t just sit back and let it go. They need to manage the process.”

Armstrong Shaw monitors the market continually for changes, and tweaks the algorithms it uses accordingly. “If we have an order and we’re using an algorithm, we’re monitoring the market and making changes. We can’t claim its best execution just because we’re using a VWAP strategy. For me that benchmark has been a joke for years. You have to measure what you’re doing and make an effort not to leave a footprint. Automation can be great, but it should not encourage mediocrity.”

Trading system providers such as REDI Global Technologies are building software development tools to make it easier for traders to customize the algorithms they use.

“We are embracing the notion of an ‘open platform’ using our software development kit (SDK), which we see as a big departure from the traditional siloed approach to financial technology,” said
Josh Schubkegel, chief technology officer at REDI. “We want to enable independent/third party vendors, software developers, clients and brokers to be able to embed, build and deploy their content and ideas on top of a rich set of services and data that the REDI platform can provide. We believe this will result in levels of innovation and product ideas achievable only through this kind of collaboration.”

Added Schubkegel, “We want to enable everyone – from the small, nimble fintech companies to the large, top-tier global banks – to be able to leverage our expertise in distribution, deployment and client support, and to have their applications and services housed within REDI with a holistic and thoughtful user experience and unparalleled application framework behind it.”

Despite the growing dependence on algorithmic trying, traders still have to assume responsibility for their proper use. “You can customize algorithms to react to whatever is happening in the market in real time, but there’s been a shift in responsibility with the buy side in having access to these tools,” said Jensen. “It doesn’t matter if you have an algorithm that can read the market in real time or anticipate or try to anticipate what’s going to happen next. You still have to manage them.”