Automation is growing in the world of trading and continuing developments suggest that what can be automated will be automated. How far can this be taken? Can human intervention be taken out of the equation altogether? Chris Skinner outlines his vision.

There is a joke that the City could be run by one man and his dog. The dog is there to make sure that the man does not touch the computers; the man is there to feed the dog. Is this vision practical? Not yet – but there are possibilities that it could be a reality in the not too distant future.

There was a massive increase in the use of programme, quantitative and algorithmic trading systems in 2004. These systems allow a significant amount of trading to be automated by storing the rules for ideal trading to take place. The systems place blocks of trading automatically at ideal market rates and conditions, based on the rules provided.

One development was Citigroup’s new bond trading system, which allowed it to buck the market by trading $13.5bn in more than 100,000 bond contracts in a 30-minute period in mid-2004. Apparently, it was only as a result of the new systems installation that this sort of trade could be made and it provided a competitive advantage. However, it also led to rival traders complaining that such trading was unfair, and to a subsequent investigation by the UK regulators.

FX markets now have trading volumes regularly exceeding $3000bn daily. And 98% of the trades are not for physical goods and services but are speculative, and could not be made without the support of the technologies built to support FX trading in the past two decades.

All of these developments suggest that the more that business can be automated, the more it will be automated; and the more that is automated, the faster, more competitive, more profitable trading becomes. It is a virtuous circle.

The question then arises about how far you can take this. Here is a vision.

All the buy-side systems calculate in real-time the portfolio risk and allocation of assets as a series of programmed trades. They perfectly match the portfolio block of trading to the sell-side systems operating in that millisecond. The trades are made automatically: systems trade with systems to make profits on the fly. At the end of the day, everything is automatically reconciled and settled … having said that, there is no end of day in this automated world, so settlements are made at the point of trade. This networked market wipes out market, credit and operational risk because no human intervention is involved.

This world is not dissimilar to the technology operations deployed in the City today. The question is where such a perfectly automated world leads. Where’s that dog?

Chris Skinner is founder of Shaping Tomorrow and chief executive of Balatro Ltd. Find out more at www.ShapingTomorrow.com or e-mail Chris at chris.skinner@shapingtomorrow.com

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