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Equities Trading technology Buy-side

Applying Technology To High-Touch Trading

By Lee Bray, Head of Asia Pacific Equities Trading, J.P. Morgan Asset Management

Traditional single stock trading processes have suffered from underinvestment, but new technologies are now being adopted that will create a more effective and structured environment.

screen-shot-2018-09-12-at-10-27-25-amOver the last few years, there has been a significant push from the financial industry to create a trading landscape around the implementation process of buy-side desks. There are a few distinct driving forces behind these changes. One is regulation, such as the Markets in Financial Instruments Directive (MiFID) II. Another is modern technology – transaction cost analysis (TCA) products are constantly changing, and algorithmic usage is now a significant portion of most trading desks’ flow.

As we have seen these changes take effect, certain areas of buy-side trading desks have been impacted more than others. Traders who can now be described as “low-touch” have benefited from significant investments in tools to help enhance their decision making, whether this takes the form of in-house models or “wheels” or accurate feedback from TCA products that can store down every parameter that the trader has applied to the stock when implementing their strategy. This has created an invaluable feedback loop in the move towards a more quantifiable implementation in their world.

Investment in single stock trading

Unfortunately, more traditional single stock trading processes have suffered from underinvestment. This critical trading role has historically been more manual in nature. As a consequence, it has been difficult to create a structured trading workflow able to provide meaningful feedback to the traders. Given that this area by definition involves trading in more costly stocks, building out this feedback loop will have positive benefits. Fortunately, we are beginning to see these changes.

The market is beginning to apply some of the techniques developed in the low touch world to the “high-touch” world. Also, high touch traders are becoming the recipients of more corporate technology spends and putting it to good work by creating innovative solutions to supplement their daily workflow.

We have seen this notably in the indications of interest (IOI) space. IOIs have been a big focus for the industry over recent years, enabling buy-side firms to assess their content much more accurately. This has been overlaid with technology and smarts from the quant world to increase the information that can be derived from what was historically a single-stock standard tool.

All IOI data is now stored down at JP Morgan, constituting millions of data points a year. Quantitative models are now being developed to highlight recommendations to our single stock traders, facilitating more efficient counterparty selection and providing more transparency to our traders around the trading landscape.

It doesn’t simply stop at IOIs. The empowerment of the single stock trader armed with information to aid decision making will continue. We are starting to see new products coming to the desk that incorporate aspects of natural language processing. Although it remains at an early stage, in time this may be significant in supplementing our traders when making key strategic decisions.

We believe the workflow of the future for the single stock trader will link changes in their strategy back to key events, while simultaneously providing information to enrich the traders’ knowledge on trade outcomes and TCA numbers achieved. In other words, the process will ultimately enable the trader to answer much more detailed questions on how their actions in trading a stock contributed to the quality of the executions.

Adding value

It is not just the internal framework for the single stock trader that is evolving; now more than ever, investment in this space is impacting the assessment of the brokerage community. Crossing rates – a proxy for measuring the value added by many single stock traders – can now be monitored and assessed much more systematically with the help of technology.

It is rarely the case in my experience that a single stock trader doesn’t want to cross stock, but the fear is that by talking to the sell-side there can be negative effects on the stock price which often proves an adverse influence. By providing up-to-date trading metrics using smarter technology, these fears can be confirmed or dismissed by actual data assessed over time. As a result, traders may feel more confident when taking the important decisions they are called upon to make daily.

The single stock trader is an important component of the modern, forward-looking trading desk. After a period of underinvestment by the industry as a whole, we are embarking on a period of change which will see significantly more empowerment of the community.

New technologies being adopted will create the kind of structured trading environment that has been used for some time in the low touch space. Far from disenfranchising the trader, these new technologies will optimise their existing workflows, helping to aid quantitatively based decisions which will ultimately lead to lower costs, in what is a notoriously tricky segment of the market to trade.


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