50 Shades of Grey Trading - the future of prop

50 Shades of Grey Trading - the future of prop

By Sam Tyfield

At FOW's event 'The Evolution of Proprietary Trading' on March 4th, there was some lively discussion about the future of point-and-click trading and other non-automated trading strategies.

What was clear (and should be emphasised) is that there exists in the markets:

* Space and opportunities for traders across the entire spectrum of trading strategies and methodologies; and

* Opportunities for all traders to benefit from automation in one form or other.

In relation to the first point, the higher frequency strategies can provide benefits to other market participants by warehousing short-term risk over short time periods and the more ‘human’ strategies and participants can warehouse longer-term risk over longer periods or by taking into account different inputs and goals. 

There has been a significant amount of discussion on both sides of the Atlantic about making markets ‘safer’ and re-enforcing trust in the secondary markets for retail and institutional investors. There is space therefore for different strategies and different participants with different risk considerations, time horizons, data inputs and execution methodologies. Having access to enormous amounts of data, vast processing capabilities, co-location etc does not necessarily make or break a strategy or prove that one participant with those will (or will not) be successful. 

Similarly, not having those will not make a participant successful or unsuccessful. If a participant has a buy-and-hold strategy then (provided that its risk limits are not tripped by price movements during the hold period) strategies or participants with different trading/hold periods should actually be beneficial to that participant when (if) it comes to buy or sell the instruments/products it wants/holds.

Hopefully, there should be space for all types of traders/investors and all types of strategies. The trick is for each of them to know against whom they are competing for revenue and ensure that whatever tools they need to do so, they have. Which leads us to the second point...

One panelist on the ‘Algo Opportunities for Prop Traders’ panel has established recently a prop-trading firm, which, currently, is mainly point-and-click. His intention is to automate much of the processes from order formation to execution, but to do so, he will identify which parts of the order chain should be automated (and how) as the firm and the strategies develop. 

He will use tools available as necessary (most bought, rather than built) in order to do so. And who knows, perhaps it will be the case that because the strategies which are running do not need to be ‘HFT’ nor to have infrastructure which is co-located etc, there will remain some or a substantial portion of the order chain which is manual. 

The trick is to identify which processes could benefit him (or free him up to do clever thinky strategy stuff) by becoming automated. Someone at the event described such automated processes as like having an “iClerk”; a clerk one does not have to pay, who does not take lunch breaks, who doesn’t get bored, who won’t take holidays and who doesn’t get your order wrong at Alfredo’s.

Long-and-short is that every market participant *should* consider whether any part of his/her order chain could benefit from automation but not consider that it has to become HFT or fully automated, unless his/her strategies demand that to be the case. Viva the Grey Box.