How equities traders can boost volumes and revenues through technology

By Michael Cashel, Global Business Development Executive (Equities), ION Markets

Global equities markets have experienced considerable volatility in the last few years, with the ensuing volume spikes causing disruptions that can impact operational processes.

In addition to this, recent events such as last year’s GameStop debacle and the Fed’s efforts to take excess liquidity out of the markets have highlighted how important scalable and performant technologies are to a trader’s ability to drive their business in an environment of near constant change.

While these ambitions are pursued universally across financial services, in equities it is crucial that they are balanced with the human element of trading relationships, which undoubtedly underpin the best returns.

The movement towards minimalism in equities trading

Today’s trading community must continue to seek efficiencies, attempting to “do more with less.” Several key drivers explain this shift, including the increased demands of regulatory reporting, appetite for centralized risk management amid change (market disruptions, technological advancement and even the transition to hybrid working) and perennial interests in boosting profitability in the face of consistently shrinking commission wallets. When volatility and volumes eventually decrease as people become more comfortable with the ‘new normal’; this pressure will only intensify.

Regulatory reporting has become a top priority for equities traders, since regulations effectively add layers of protection for investors, set best practice and endorse responsible behavior at a time when the markets are rapidly changing and becoming increasingly interdependent. Practices such as monitoring and reporting are therefore critical for stakeholders to stabilize and maximize their performance, financially and reputationally. In the current moment, manual processes struggle to cover complex audit and exam requirements, and in a world where time and precision are crucial, automation becomes an absolute necessity.

Fast-paced markets that are susceptible to volatility demand slick, scalable and robust operations. Effective risk management – including the ability to respond both actively and reactively to, regulatory, and technological change in the equities space is critical. Embracing disruption is essential. This is particularly the case given the constant pace of change in the equities market, the fact that competitors are continuously digitizing, and that new enhancements to technology platforms are offering mass efficiencies. Firms must think about capitalizing on new trading capabilities, all while minimizing risk. The transition to hybrid working, with teams located far from one another, and the increasing likelihood that hybrid will remain part of the landscape going forward suggests that it is even more important to tighten and centralize critical functions.

Finally, while interest in cost-cutting remains a priority, delivering efficiencies that can drive meaningful revenue growth is the priority. Industry analysts, Celent, recently found that 73% of capital markets participants expect that increasing revenue will be the business focus of the trading desk over the next three years, while 27% expect the focus to be cost cuts. Financial performance is perhaps the most obvious – and among the most important – priorities driving the trend to streamline trading in equities.

Automation as a catalyst for profitability

The financial community tends to think of the equities markets as being leaders in innovation and sophistication when it comes to automation, and for good reason. Equities practitioners are faced with near constant change. In recent years we have seen increased retail participation, smaller print sizes as visible liquidity is increasingly fragmented and dispersed to multiple execution venues, new global competition, continued performance challenges in the active community, and increases in passive management. This constant evolution presents challenges and opportunities that innovations in the technology around workflow processing can solve.

If equities traders are looking for ways to safely drive scale and profitability while executing globally, and at the same time tightening their operations, by far the most efficient route is by automating workflows and leveraging electronic execution tools that maximize each participants business model. From portfolio trading solutions, to trained algorithms and AI strategies to internalization strategies, Central Risk books, crossing and smart order routing, these innovations facilitate the movement of structured data, allowing traders to manage their orders with greater efficiency and precision.

In the short term, we can see how such tools – by managing complexities and aggregating data for application – permit traders to maximize their throughput and therefore, profitability. Traders can expand their reach, boost the volume of trades processed, and ultimately, drive revenue. In addition, automation also allows for fewer reconciliations, leaving less room for potential manual errors or risks.

But it is vital to inspect the bigger picture. With automation taking the heavy lifting out of commoditized orders and managing the manual, repetitive baseline tasks in human traders’ former duties, teams are granted more time to focus on the execution of their high-value orders and the facets of these operations where human intelligence and creativity are most effective and useful.

Where today’s firms have found that market knowledge is critical, automation can reinforce human insight and underpin a proactive, anticipatory approach to trading. In the long term as well as the short, this makes it a force multiplier for profitability.

What is ahead?

To keep pace with the rate of automation, equities traders must continue to adapt, albeit at different paces. A recent report by Coalition Greenwich found that while 44% of equity trading volume is automated, there remains a wide gap in the degree of automation. Notably, the extent and scope of automation will always remain contingent on the composition of individual businesses. Those firms which are more ‘people-intensive’ – for instance, those requiring people to sell blocks of stock to others – will evolve differently to those which are focused on trading large volumes via electronic execution.

We can therefore expect to see a consistent uptake in automated software, principally driven firms, with a foremost interest in trading higher volumes, and front offices driven by latency sensitivity. More firms are increasing the automation of their equity trading by volume and order type. Today’s traders are finding a means to maximize profitability and drop old inefficiencies, while continuously upgrading technology and automation to meet new performance and transparency standards. Overall, bringing together automation and human talent in equities presents remarkable opportunities for continual development and adaptation – both areas in which global equities markets continue to excel.