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Crowdsourcing Excellence in Automated Trading

Crowdsourcing Excellence in Automated Trading

27 March 2015 2:00pm EDT

Automated trading has become an integral tool for an increasingly large percentage of market participants. The speed, efficiency, and ease of automated trading has made it attractive to the full spectrum of organizations that interact with our markets, including principal traders, banks, asset managers, pension funds, and commercial hedgers. Even individual investors make use of automation and benefit from the increased liquidity and narrower spreads that have resulted from increased automation.

The widespread adoption of automated trading systems has provided a range of benefits, but it also creates the need for updated risk management practices. As principal traders, we have extensive experience in automated trading systems, and we recognize the importance of principles-based risk management and system safeguards.

For the past year, FIA PTG members have been working alongside representatives from FIA and FIA EPTA on a comprehensive and detailed review of automated trading systems and operations. We shared our expertise on automated trading and worked hand-in-hand with brokers and exchanges to cover a wide range of topics that organizations—both large and small—should be thinking about.

The result is the Guide to the Development and Operation of Automated Trading Systems; a comprehensive overview of the approaches that should be considered when building, managing, and supporting automated trading systems. 

It’s a comprehensive guide in more ways than one: First, it addresses the full spectrum of subjects that should be considered with respect to automated trading systems, including:

  • Pre-Trade Risk Controls, such as maximum order size, price collars, and message throttles.
  • Post-Trade Analysis, such as drop copy reconciliation, credit controls, error trade policies and audit trail.
  • Co-Location, and issues including fair and equal access to exchanges.
  • Disaster Recovery and Business Continuity.
  • Automated Trading System Development and Support, which covers software development, testing, and the management, implementation and review of source code.
  • Security, including cybersecurity.
  • Trading System Operations, including failure detection and emergency notification procedures
  • Documentation of policies, procedures and systems.

Second, this guide is comprehensive in that it can serve as a resource for a variety of market participants, across asset classes. We’re also looking forward to sharing our work with regulators as they continue to oversee the growth of automated trading. 

Our goal was not to write a cookbook-style manual with step-by-step recipes for risk controls because that simply wouldn’t work. There are many types of firms using automated trading systems and prescriptive, one-size-fits-all recommendations wouldn’t be constructive. So rather than trying to identify a specific practice as best, what we’ve done is highlight the thought processes and considerations required to develop automated trading systems.

The result is a guide designed to help each firm to think about potential risks and smart ways to manage those risks.

Now it’s up to each of us to apply these guidelines to our own businesses. At the end of the day, all of us are linked together in the market ecosystem. Sharing our thoughts on how to manage the technology and operations associated with automated trading is the best way to maximize the benefits of automated trading. 

Read the full Guide to the Development and Operation of Automated Trading Systems.

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