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5 Ways Electronification Will Shift the Role of The Trader

Traders Magazine Online News, September 4, 2018

Sanjay Marwaha,

The New York Stock Exchange attributes “the human element” for “lower volatility, deeper liquidity and improved prices,” but anyone following the markets can see that trading is well on its way to full automation – for good reason too. A recent survey from Liquidnet found 63% of the global asset management firms surveyed (representing $1.3 trillion AUM) plan to switch to greater trading automation. The electronification of trading offers a slew of benefits for both buy- and sell-side firms as well as market makers and investors. Equities serve as a great case study; the first to incorporate electronic trading, they’ve since seen prolific growth in trade volume, lower margins, and higher returns for investors.

But this isn’t a piece about robots or tech taking away jobs; in fact, just the opposite - traders aren’t going away. The markets are a long way from reaching the operational efficiency of a truly automated system. But the role of the trader will shift as they become supervisors of the new market makers: algorithms. If handled correctly, algorithms can act like gas on a trader’s intellectual fire, fueling the human’s ability to draw smarter conclusions based on better data. Despite the fear that legacy thinking can cause, algorithms aren’t trader killers, but rather trader enablers. Here are five ways electronification will shift the role of the trader:

Traders as analysts

The human act of trading requires extensive time and attention to detail. As more market participants adopt digital and algorithmic- or data-based tools, trades will happen faster and at greater scale than ever before. Reporting those trades will be faster, as well. Regulating bodies including FINRA and the SEC require that exchange trades be reported no later than 10 seconds following trade execution. Real-time trade reporting is time consuming for market makers and sell-side firms, but electronification alleviates that administrative burden, and keeps the time between execution and reporting down. Through electronification, firms can reduce compliance mishaps as technology automatically stores, distributes and reconciles trading information in the trade reporting platform.

The human will be unseated by the technology – sort of. Instead of executing and reporting trades, traders will allocate newly available capacity to focus on forecasting, analysis, and quality assurance, all important fragments of operating a sustainable trading environment. As humans focus on analysis over execution, theindustry will also see reduced rates of human error.

Traders as teachers

Thanks to digital and social media, traders – human and robotic – have real-time access to any market-moving news. Though natural language processing is learning quickly, humans are better able to use their judgement in reviewing media sentiment and teaching the algorithms. This is an area where humans aren’t likely to ever be replaced: traders are more adept at spotting systemic trends from non-structured data – like market moves affected by geo-political events – and automation will allow them to spend more time doing this.

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