equities evolution of trading.pdf

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
EQUITIES TRADING:
FORGING THE FUTURE
OF AUTOMATION
DATA-FIRST
THINKING
An LSEG Business

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
While automation and the data proliferation
have been in focus for quite some time, the
past couple of years have further catalysed the
importance of these technology driven elements
and have helped reshape expectations for
market change going forward.
To understand this evolution more clearly, Refinitiv, an LSEG
business, teamed up with Coalition Greenwich to produce a
three-part series of reports exploring current market perceptions
and expectations for future change across asset classes.
Increased automation and electronification, continued pressure
for and response to cost rationalisation, a heightened focus on
analysis, trends toward consolidation and new skills required on
the trading desk are just some of the themes we focus on in
the series.
The findings come from an online survey of close to 250 market
professionals, globally, and are analysed across asset classes,
regions and organisation type.
For this particular report, we heard from 91 equities market
participants. As for the equities markets, they are efficient, liquid
and already highly automated. Traders need to adapt quickly to
the pace of change to continue to succeed.
We now invite you to read our report titled Equities Trading:
Forging the Future of Automation written by Shane Swanson,
Senior Analyst, Head of Equities, Coalition Greenwich.
At Refinitiv, an LSEG business, we remain committed to
providing an open ecosystem of multi-asset class capabilities
and market-leading data and analytics solutions at scale to
empower the next generation of the trading community.
We look forward to sharing our other findings which
help give a further glimpse into our ever-changing
world of trading.
Dean Berry,
Group Head of Trading &
Banking Solutions, LSEG
Quentin Limouzi,
Head of Order and Execution
Management & Equity
Trading Solutions, LSEG
EXECUTIVE SUMMARY
1

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
METHODOLOGY
Between July and September 2021, Refinitiv, an LSEG business, in partnership with Coalition Greenwich, conducted interviews with 248 equities,
fixed income and FX global markets professionals to better understand the impact of technological innovation on capital markets. Study participants
represent a range of organisation types, including buy and sell side, exchanges, trading venues, fintechs, consultants, and data providers. Questions
explored how client needs, market structure evolution, regulatory changes, and cost pressures are all driving the markets forward.
Equities
FX
Credit
Rates
Commodities
Other
37%
33%
28%
28%
26%
8%
North America
Europe
Asia
Other
44%
27%
28%
1%
Asset class Region
Sell Side
Buy Side
Technology/data/information provider
Exchange/trading venue
Consultant
Other
40%
29%
8%
12%
5% 6%
Organisation type
PARTICIPANT PROFILE
North America: US (83), Canada (11), Mexico (1)
Europe: UK (46), Sweden (5), Netherlands (4),
Norway (1), Ireland (1), Latvia (1)
Asia: China (4), Hong Kong (18), Singapore (15),
India (15), Australia (6), Myanmar (1)
Other: South Africa (1)
2

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
AUTOMATION
Equities markets are highly automated,1
with trade execution, order entry into the market and order
staging into order management systems/execution management systems (OMS/EMS) being the most
automated processes.
These findings correlate to other shifts seen in the industry. For example, from 2012 to 2021, the buy
side has moved its trading away from majority high touch – from 56% to 44%.2
This is a microcosm of
a much larger change occurring in the equities market as a whole.
1
See, e.g., https://www.sec.gov/files/Algo_Trading_Report_2020.pdf
https://www.greenwich.com/equities/us-equity-market-2021-spend-and-trends
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma20141_-_hft_activity_in_eu_equity_markets.pdf
2 https://www.greenwich.com/equities/us-equity-market-2021-spend-and-trends
Trading automated by % of ADV
On ‘average’, 44% of equity trading volume is executed in an automated fashion.
44%
Percentage of trading volume automated
Total
Note: Based on 91 respondents.
Source: Coalition Greenwich 2021 Evolution of Trading Study.
Note: Low sample size, particularly in Asia.
3

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
While on average, 44% of equity trading volume is automated, it is striking how bifurcated firms
are in their degree of automation. Firms are either very, very automated or not very automated
at all, with very few firms in the middle. Among our respondents, 34% reported 75% or more of
their equity trading as automated. On the other end of the spectrum, 56% of firms indicated 25%
or less of their trading being automated. Over time, we fully expect more firms clustering on the
higher end of the automation spectrum.
Equities professionals across the board expect to be
spending more time on automating processes than
on any other task, with a whopping 66% increasing
their focus over the next one to three years.
Of course, anyone who has spent time dealing with any part of the equities lifecycle has likely
noticed this continued shift – from the front end of the trade itself, to the processing of market
data, to the analysis of the data about companies, to the back-end settlement and clearance
of the order, to the compliance and regulatory processes that cover front to back of every
transaction – each step has become ripe for improved automation.
66%
55%
47%
44%
44%
36%
35%
30%
25%
24%
28%
36%
42%
45%
49%
40%
54%
56%
51%
25%
3%
7%
8%
8%
4%
12%
9%
13%
16%
24%
3%
2%
3%
3%
3%
12%
2%
1%
8%
27%
Working to automate processes/workflows
Digitally communicating with customers/partners
Manipulating/analysing data
Creating content for clients (analytics, research, other)
Consuming content (i.e., research, news, etc.)
Speaking with colleagues
Analysing data (i.e., writing code, performing calculations, etc.)
Preparing regulatory reports
Equities (91)
Spend more time Spend same amount of time Spend less time Don’t know/NA
Speaking to customers/partners
Digitally communicating with colleagues
Time to be spent on important activities
More equities professionals expect to spend more time working on
automation in the coming 1-3
years than on any other activity
Note: Based on 91 respondents. May not total 100% due to rounding.
4

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
Our data shows that firms are most interested in using automation to further enhance the downstream
parts of the trade lifecycle. In particular, these areas were seen as most deserving of attention:
REGULATORY REPORTING | 44%
POST-TRADE EXECUTION ANALYSIS/TRANSACTION
COST ANALYSIS (TCA) | 38%
PRE-TRADE PRICE DISCOVERY | 37%
POST-TRADE PROCESSING/SETTLEMENT/
EXCEPTION MANAGEMENT | 36%
COMPLIANCE CHECKS | 36%
TRADING PROCESSES TO BE AUTOMATED FURTHER
44%
Regulatory Reporting
38%
Post-trade execution analysis/TCA
37%
Pre-trade price discovery
36%
Post-trade processing/settlement/exception management
36%
Compliance checks
33%
Risk Management
26%
Trade execution
25%
Market risk limits
19%
Client pricing/responding to incoming RFQs
18%
Order staging into your OMS/EMS
15%
Order entry into the market
1%
Other
12%
Don’t know/NA
Equities (91)
More electronic markets are focused on reporting and compliance,
while less electronic markets focus on price discovery and trading.
In a world of ever-increasing regulatory burdens, enhancing the ability to automate regulatory
reporting is not just a ‘nice to have,’ it is an absolute necessity. Beyond the needs of meeting
the Consolidated Audit Trail requirements (which for all but the very smallest of reporters require
significant automation), the entirety of the regulatory program within each firm now requires significant
automation. Whether it is to ensure trading compliance, reporting compliance, communication
compliance, or otherwise, paper tickets or simple samples are not going to be sufficient in a more
complex organisation. To fulfill the requirement of every audit and exam to show what the organisation
planned to do, show that it did, in fact, do what was intended, prove that what was done was
appropriate, and that it tested for and documented all of the above is not something that can be
handled on a manual basis.
Along these lines, post-trade execution analysis and TCA is not a simple check-the-box exercise.
Historically, a simple analysis as to whether child orders were executed within the National Best Bid
and Offer (NBBO) might have been sufficient to prove best execution. Times have certainly changed.
The ability to not only use TCA to help spot outlier executions, but to also improve algorithms and
vendor performance is de rigueur. Of course, to fully unlock the value that these processes can
provide, a great deal of thought must go into the design of the underlying analyses.
In a similar vein, pre-trade price discovery has become much more a science than an art. Using big
data and advanced analytics, firms are getting closer and closer to the ideal of determining what to
trade, when to trade, and, importantly, how much to trade. This, of course, presupposes that there is
data and compute power to support all of the above. It must be noted that the industry’s continued
adoption of cloud has played a huge role in making this progress possible.
Trading processes to be automated further
More electronic markets are focused on reporting and compliance, while less
electronic markets focus on price discovery and trading
5

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
OLD HABITS DIE HARD
In an automated world, it is intriguing how many tasks are still handled on a manual
basis. We found that nearly half (47%) of respondents are manually moving data from
one application to another on a daily basis. Although spreadsheets, text messages
and the like may seem rather antiquated these days, nearly a quarter (23%) are still
manually creating an order ticket each day. And industry participants are not just
taking time to move data around (although 29% are cutting and pasting from Excel),
they are also literally waiting for data to load (38%). In some cases, replacing legacy
infrastructure with cloud-deployed solutions will go a long way toward easing this
burden. As much as the equities industry likes to think of itself as the leading bastion
of automation, there is clearly still work to be done.
Possibly the most surprising finding in legacy technology, albeit one which viscerally
rings true, is that the top must-have tool was … email, with 29% selecting it as
number one. Market data, phone and office tools all tied for second place at 12%
each. We know that email is ubiquitous and touches well more than just the trading
lifecycle. However, it is also slow, asynchronous and often a much poorer form of
communication than others that are readily available.3
However, muscle memory
is hard to overcome, email is built into the regulatory schemes at firms, and will
therefore remain a meaningful part of the industry toolkit for some time to come.
47%
Manually entering data from one application
into another
36%
Waiting longer than expected for data to load
29%
Cutting and pasting from Excel into an
enterprise application
23%
Manually creating an order ticket
15%
Emailing a spreadsheet with securities prices,
orders or interest to a trading counterparty
22%
None of the above
5%
Don’t know/NA
Equities (91)
PREVALENCE OF MANUAL ACTIVITIES
BY ASSET CLASS
Manual data is still common despite recent technology innovations and the
push for autromation showing there is more work to be done
Prevalence of manual activities by asset class
Manual data is still common despite recent technology innovations and
the
push for automation showing there is more work to be done
3
To be fair, email also provides an excellent record of activity, and has been incorporated more and more into other
systems to help create a more seamless experience for traders.
6

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
COST CONSCIOUS
Equities have been at the forefront of driving trading costs down.
Retail commissions went from hundreds of dollars per trade to zero
in the span of several decades. Institutional commissions have
also seen significant squeezes. At the same time, robust regulatory
regimes require significant commitment to an endless upgrade
of hardware, software and human capital to remain compliant. In
addition, trading itself remains as competitive and complex as ever.
Faced with these seemingly stark choices – declining commissions,
increasing obligations and technological challenges, where do firms
find equilibrium?
Email
Market data terminal
Phone
Office tools (i.e. Excel, Powerpoint)
OMS
Trading venue access
Chat/collaboration tools
Data/Analytics Tools (i.e. libraries, APIs)
Electronic distribution channels
EMS
Other
Equities (91)
Rank 1 Rank 2 Rank 3
29%
12%
12%
12%
8%
8%
7%
5%
4%
1%
16%
14%
10%
12%
3%
9%
11%
13%
4%
14%
8%
11%
20%
2%
7%
15%
5%
7%
1%
2%
1%
MOST IMPORTANT TOOLS FOR ON JOB WORKING
E-mail remains a must-have despite more modern options.
Most important tools for on job working
7

APPROACHES TO COST CUTTING IN 2021
37%
Increase use of electronic trading/trading automation
35%
System/vendor consolidation
28%
Reduce office space/locations
26%
Reduce data costs
24%
Focus on automation of post-trade processes
20%
Increase the use of cloud computing
15%
Reduce headcount/hiring freeze
13%
Merging with/acquiring other firms
11%
Reduce software spending
5%
Other
12%
Don’t know/NA
Total (103)
Business leaders view that vendor consolidation and increased trading
automation are the primary tools for cost cutting in 2021
Increased automated trading helps to both direct trading to lower-cost
channels, but also to lever the amount of coverage for each trader.
System and vendor consolidation allows firms to concentrate on what
makes them successful and offload to specialists anything for which
their own in-house expertise is deemed unnecessary, often at a lesser
expense. Of course, it is imperative that firms maintain clear insight
into their third-party vendors, both for cost control and to meet their
own regulatory requirements.4
Interestingly, when separating the buy side and sell side, slight differences do
creep into the data. The sell side places more emphasis on vendor and system
consolidation (which may have to do with their heavier emphasis on direct
trading and the associated data and downstream headaches). The buy side is
also looking more into the use of cloud to reduce costs.
4
See, e.g., https://www.finra.org/rules-guidance/notices/21-29
Approaches to cost cutting in 2021
Business leaders view that vendor consolidation and increased trading
automation are the primary tools for cost cutting in 2021
FORGING
THE
FUTURE
OF
AUTOMATION
EQUITIES
TRADING
Across asset classes, the most important
cost-reduction strategies are increased use
of trading automation (37%) and system
and vendor consolidation (35%).
8

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
When contemplating the vendor consolidation question, firms are also grappling with how much
infrastructure they should build and maintain themselves. In the OMS space, the question has largely
been answered that this is an outsourced game. A few standouts remain, but most firms recognise
that the challenges of maintaining an OMS that constantly needs to be tweaked for regulatory
changes, back-end changes and updates is a system that can and should be managed by a vendor.
And these days, those vendors are generally offering services based partially or wholly in the cloud.5
As the COVID crisis taught the industry, the world can change nearly overnight. The ability to respond
quickly is vital. The need for dependable partners in the times of crisis is paramount.
5 See, e.g., https://www.greenwich.com/market-structure-technology/cloud-solutions-drive-order-and-portfolio-management-innovation
The buy side is relatively more focused on automation to reduce costs,
while the sell side leans more towards vendor consolidation
BY FIRM TYPE
37%
23%
23%
27%
30%
27%
10%
7%
3%
7%
13%
Increase use of electronic trading/trading automation
System/vendor consolidation
Reduce office space/locations
Reduce data costs
Focus on automation of post-trade processes
Increase the use of cloud computing
Reduce headcount/hiring freeze
Merging with/acquiring other firms
Reduce software spending
Other
Don’t know/NA
Buy Side (30)
41%
50%
28%
28%
22%
9%
19%
9%
16%
3%
6%
Sell Side (32)
APPROACHES TO COST CUTTING IN 2021
Planning to cut cost in 2021
by firm type
The buy side is relatively more focused on automation to reduce costs, while the sell side leans
more towards vendor consolidation
The ability of firms to utilise cloud
services – not just for OMS, but
for many parts of their businesses
– to meet the requirements in the
early days of working from home
during COVID proved to be critical.
9

A FUTURE IN THE CLOUD
The ability of firms to use cloud to support the shift to WFH and the ensuing volatility of the COVID crisis is a
testament to careful planning, as well as quick action, taken by market participants industrywide. Firms that may not
have been as convinced about the capabilities of cloud have certainly had the opportunity to see the performance
benefits in the most real-world of tests.
In equities and commodities, 61% of firms have either fully or partially migrated to the cloud, compared with 42% of
those working in FX or fixed income. Newer digital asset classes have their exchanges hosted entirely in the cloud.6
Although equities overall are not ready to fully shift their matching engines to the cloud, Nasdaq has publicly stated
they expect to be fully migrated by 2030.7
There are still technological (and compliance and customer) issues to be
solved and industry members to be persuaded, but cloud was definitely given a big boost by its performance when
COVID struck.
6 See, e.g., https://cloud.binance.com/; https://www.nasdaq.com/solutions/cryptocurrency-exchange-software
7 https://www.wsj.com/articles/nasdaq-ramps-up-cloud-move-11600206624
ATTITUDE TOWARDS CLOUD COMPUTING
BY ASSET CLASS
29%
53%
5%
10%
We are fully migrated to the cloud/It is the only
way forward, and we are actively working to move
all of our technology to the cloud
Cloud computing is part of our technology
roadmap, but only for specific business functions/
We are examining the use of cloud computing,
but a long term plan has not yet been agreed
We require our data to be stored *on prem* in the
country/We have decided to not move our
technology to the cloud for the foreseeable future
Don’t know NA
Equities (91)
30%
51%
5%
12%
FX (81)
31%
48%
7%
12%
Fixed income
(109)
32%
48%
6%
14%
Commodities (65)
Equities has a slight edge with cloud
Attitude towards cloud computing
by asset class
Equities has a slight edge with cloud
FORGING
THE
FUTURE
OF
AUTOMATION
EQUITIES
TRADING
10

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
And while neither the buy side nor the sell side have cloud as their main attraction for cost-cutting,
the buy side has a stronger focus on it. This may help explain why the buy side is further along in
their move to the cloud, with 52% fully or partially migrated versus 42% of the sell side.
16%
11%
36%
14%
7%
3%
13%
11% 13%
31%
14%
5%
2% 2%
21%
We are fully
migrated to
the cloud
It is the only way
forward, and we
are actively
working to
move all of our
technology to
the cloud
Cloud computing
is part of our
technology
roadmap, but
only for specific
business
functions
We are examining
the use of cloud
computing, but
a long-term plan
has not yet been
agreed
We require our
data to be
stored
‘on prem’
in the
country
We have
decided to
not move our
technology to
the cloud for the
foreseeable future
Other Don’t know/NA
Current Firm Attitude Towards Cloud Computing
Buy Side (70) Sell Side (97)
ATTITUDE TOWARDS CLOUD COMPUTING
BY FIRM TYPE
As we consider cloud opportunities, one obvious area of focus will be the ability to
use cloud and related services to perform complex calculations closer to the trade
itself. Today, 44% of benchmarks are calculated in real time, by far the predominant
method of calculating benchmarks. While not all firms are doing such calculations
in the cloud, the rationale for doing so becomes stronger all the time. That said,
the ability to source, validate, and interpret such data becomes critical.
Moreover, once the calculations have been made, firms must determine how and
where they will trade, and those determinations can also be computationally complex.
Current and historical volumes, spreads and volatility are all a part of that decision. With
the need for all this data, it is only somewhat surprising that just a fifth of respondents
felt that reducing data costs was on the list for 2021, recognising that, as always, data
is the lifeblood of trading.8
8 See, e.g., https://www.greenwich.com/market-structure-technology/future-trading-redefining-data
Attitude towards cloud computing

by firm type
The buy side has moved ahead of the sell side in cloud adoption
11

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
TRADERS IN AN
AUTOMATED WORLD
For many years, the doomsayers have prophesised that the human trader was imminently
going to be replaced by robots.9
Bluntly, we disagree.
Data skills are increasingly critical on trading desks
IMPORTANT SKILLS ON TRADING DESK IN NEXT 1-3 YEARS
68%
62%
49%
48%
48%
46%
38%
32%
1%
3%
Data analysis/Data science
Market knowledge
Multi-asset class knowledge
Market structure knowleddge
Market experience (i.e. time in the industry)
General technical aptitude
Relationship management
Programming/Coding
Other
Don’t know/NA
Equities (91)
44%
Real-time
7%
Once a day
11%
A few times
17%
Hourly
3%
Never
18%
Don’t know/NA
Benchmark Calculation Frequency
Equities (89)
CALCULATING BENCHMARKS
The market is heavily weighted towards real-time benchmark calculations
With data in our sights, the next issue to tackle is the use and management
of that data. This is also a top priority for our respondents, with almost 70%
identifying it as a critical skill on the trading desk over the next several years.
Calculating benchmarks
The market is heavily weighted towards real-time benchmark calculations
Important skills on trading desk in next 1-3 years
Data skills are increasingly critical on trading desks
9
See, e.g., https://www.fnlondon.com/articles/rise-of-the-robots-virus-hastens-the-
end-of-human-traders-20200526; https://www.techerati.com/the-stack-archive/
big-data/2018/05/23/meet-the-startup-that-could-put-an-end-to-human-traders/;
https://www.yahoo.com/now/why-stock-market-traders-should-be-terrified-of-
robots-in-the-next-decade-130024382.html
12

EQUITIES
TRADING:
FORGING
THE
FUTURE
OF
AUTOMATION
However, that does not mean that the trader of yesterday is the same trader as today,
nor is the trader today the same trader we will have tomorrow. The markets continue to
evolve. Traders and firms must do the same.
Experience alone does not suffice. In fact, firms find that market knowledge is more
important than simply having time in the market. Especially in a COVID-endemic world,
where remote work is likely to make up some part of the future in many firms, having
‘face time’ is not going to be anywhere near as important as having impact.
34%
52%
3%
10%1%
Expected Situation
Equities (91)
Full-time in the office
Part-time in the office (i.e. hybrid)
Full-time at home, near the office
Full-time at home, not near the office
Other
Don’t know/NA
24%
59%
7%
9%1%
Preferred Situation
Equities (91)
Full-time in the office
Part-time in the office (i.e. hybrid)
Full-time at home, near the office
Full-time at home, not near the office
Other
Don’t know/NA
HYBRID WORKING IS EXPECTED BY MOST AND
PREFERRED BY MORE IN THE COMING YEAR
Hybrid working is expected by most and
preferred
by more in the coming year
The way to have impact is to make sure you
have the skills that are needed to survive
and thrive in a data-rich environment.
Equities market participants will need to use the
tools and systems that give them insights into the
market, into their own firm and into the data to trade
proficiently, clear and settle efficiently, and surveil
pragmatically and effectively.
13

FORGING
THE
FUTURE
OF
AUTOMATION
EQUITIES
TRADING
CONCLUSION
Pandemic becomes endemic becomes ‘new normal.’ Retail trading is generally
thought to have limited impact on the markets, and then Robinhood and the
Reddit crowd suddenly unleash a new understanding of how these forces can
move mountains. The fears of robots upending the natural order may have
been overplayed, but real worries exist about algorithmic optimisations in the
real world, and the spillover into the markets is happening in real time. The only
constant is change.
However, as challenging as change can be, it also provides the settings that
allow for improvement and adaptation – areas in which the equities markets
have excelled at over time. Bringing together automation, cloud, data, and the
human talent to weave them all together, we believe that the future for equities
remains bright.
14

An LSEG Business
Visit refinitiv.com
@Refinitiv Refinitiv
Refinitiv, an LSEG (London Stock Exchange Group) business, is one of the world’s largest providers of financial markets data
and infrastructure. With $6.25 billion in revenue, over 40,000 customers and 400,000 end users across 190 countries, Refinitiv
is powering participants across the global financial marketplace. We provide information, insights and technology that enable
customers to execute critical investing, trading and risk decisions with confidence. By combining a unique open platform with
best-in-class data and expertise, we connect people to choice and opportunity – driving performance, innovation and growth
for our customers and partners.
RE1511642/2-22

equities evolution of trading.pdf

Recommended

Recommended

More Related Content

Similar to equities evolution of trading.pdf

Similar to equities evolution of trading.pdf (20)

Recently uploaded

Recently uploaded (20)

equities evolution of trading.pdf