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The current state of automated trading for banks and financial services companies

Senior Business Analyst and Financial and Banking IT Consultant, ScienceSoft


Equities trading, once carried out by literally yelling out prices and the amount of stocks to sell and buy, is now going through a technological revolution. For the last decade, we have been able to observe how markets were becoming more electronic, bringing information technologies to the fore. The reason for that is simple: traders were seeking ways to decrease costs and increase the speed of operations to capture the alpha. While these arguments have clearly satisfied investors, such changes have posed a significant challenge to the investment banking industry.

Automated trading for banks and financial services companies

Goldman Sacks makes headway in equities trading automation

Automated systems for equities trading has already become a sizable trend in some banks. For example, Goldman Sacks has been heavily investing in electronic capabilities over the last 15 years, which reduced their need for human labor.   

As stated in a recent report by the MIT Technology Review, in 2000 Goldman Sachs had about 600 US stock market makers in New York alone. But since automated trading programs assumed the bulk of the work, there are only two cash equities traders now.

Mr. Chavez, a prominent C-level executive of Goldman Sachs, commented that currency trading will follow suit. This decision is supported with Goldman Sachs’s research, which found out that four traders could be replaced with one computer engineer. The bank has already started implementing its new hiring politics, and currently approximately a third of Goldman Sachs’s staff are computer engineers.

Automated trading expands into other fields of finance

Such transformation that took place at Goldman Sachs is not an exception, and computerized trading is now moving into other fields of finance as well. For example, the Bank of International Settlements has published a report on electronic trading in fixed income markets. Giving the percent of the fixed income market traded electronically between 2012 and 2015, the study shows the rapid growth in such asset classes as interest rate swaps, US Treasuries, precious metals, FX options and swaps as well as repos.

The landscape of these markets is changing rapidly, since new tech-savvy companies have also shown interest in the fixed-finance pie. For example, in September 2016, Risk.net published a list of the top companies by volume traded on BrokerTec, an ICAP-owned trading platform for US Treasury. Surprisingly, most rankings belong not to banks but to high-frequency trader firms, such as KCG, Spirex, XR Trading, DRW and others. Another example comes from the FX market where the computerized market maker XTX Markets Ltd. has become one of the world’s biggest spot currency traders in just a couple of years.

Technological background behind automated trading

To create automated trade schemes, companies develop complex algorithms that closely emulate the behavior of a human trader. Such innovative ideas can be realized thanks to artificial intelligence (AI) and machine learning software. For example, Goldman Sachs has strong ties with AI software provider Digital Reasoning to track its traders’ activities. Also, NASDAQ cooperates with Digital Reasoning to monitor trading data, communications, emails, chats, etc. to identify malpractice across the entire electronic stock exchange. Thus, using such technologies, banks and financial services companies can generate trading ideas and decide when, where and with whom they can execute a trade with the greatest efficiency. Consequently, the staff will need to become proper financial advisors to customers, making trading the most skilled ever.

The potential of automated trading

The speed of electronic markets demands high efficiency from traders. To make quick and precise order entries as well as implement comprehensive trading plans, banks and financial services companies went for automated trading solutions. Although possible hardware meltdowns and other technological issues impose certain risks on trading operations and profitability, a strong and reliable trading decision is the one that can outweigh any risk.

If the need for computerized precision and speed is an essential component of a bank’s trading approach, then automated trading is more a friend than a foe. In case speed is not a high-priority factor, then automated trading systems may be a costly and unnecessary undertaking. 

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