Fund managers seek alternatives to automated trade-study

Date: Tuesday, December 11, 2012
Author: Luke Jeffs, Reuters

Almost a third of fund managers believe automated trading has had its day and are considering a move to alternative trading methods, including a return to "human-led trading models", a study released on Monday showed.

But any mistrust of automated trading by fund managers contrasts sharply with the attitude of brokerages and investment banks, where 67 percent of firms are looking to increase the use of automated trading.

The diverging trends around automated trading - or using computer models to trigger buys and sells based on trading patterns and other indicators - are revealed in research from system vendor MathWorks.

"The buy-side's (fund manager's) attitude to automated trading is partly a reaction to the commoditisation of trading access and reflects the preference clients have for good investment ideas ... over electronic trading capabilities," said Steve Wilcockson, a manager at MathWorks.

Systems-based trading has grown in the last two decades to dominate trading in the most liquid markets such as shares, futures, currency and government bonds.

But the practice has been called into question in recent years following various high-profile problems involving electronically traded markets.

The "flash crash" in May 2010, in which nearly $1 trillion in stock market value disappeared when the Dow Jones Industrial Average plunged about 700 points before rebounding, highlighted the risk of contagion between electronic markets.

It also exposed the prominent role of a few large hedge funds which rely on computer-driven strategies to churn out millions of trades a day.

Some politicians have expressed concerns about these so-called high-frequency trading techniques and are looking to introduce rules, such as "speed limits" that force market participants to put through trades at no faster than half a second.

Electronic trading was also implicated in problems at brokerage Knight Capital, which needed to be bailed out by rivals after it lost $440 million in just a few minutes when an electronic trading programme went haywire in August this year.