Stuart Lawrence: Automation of the trading desk

Head of UK equity trading at UBS Asset Management, Stuart Lawrence, speaks to The TRADE about the importance of automation and the ways in which it will provide benefits.

Stuart Lawrence

Why is streamlining end-to-end workflows using automation so important?

At UBS Asset Management the equity trading desk executes for all strategies.  As with our peers, a decent percentage of the flow is small in notional value and/or ADV and there is little value-add a trader can provide to these orders. However, without automation, they must spend time dealing with this subset and this comes with the opportunity cost of them being unable to focus on trades for which they can provide more value.  Automating the execution process for these order types reduces the ‘white noise’ on the desk which, in turn, improves efficiency and provides space for innovation.  Traders are no longer just button pushers.

With auto-marking and booking, we can reach the point that an order can be sent, executed and booked without the trader needing to press a button.  It should be noted that our desk still has oversight over the automated flow.

What issues do unstandardised order flow and order entry pose to the trading desk and how can automation alleviate these issues?  

Unstandardised order flow is usually a small percentage of the overall business that we execute but is both time-consuming and onerous for the desk.  By automating this flow, we are able to make the process more efficient and free up the trading team.

We took the approach of not trying to build solutions to all order flows types immediately.  We began with basic order flow and are now adding more nuanced order types to our automated routines.  Eventually, most non-standard subsets should be able to be automated.

How can workflow automation improve oversight on the trading desk and beyond?

In terms of oversight, the main improvement is – through automation and via our algo wheel – removing broker bias. Traders naturally have broker preferences, often due to perceived performance as opposed to hard data and can also develop a ‘muscle memory’ for using the same counterparties. By removing this control for subsets of orders, we treat all brokers within the wheel, or whoever we use for automation, in a balanced manner. We can then drill down and analyse the performance data accurately. Often when you look at the actual data, the venue analysis, etc., you find what you had thought was true is, in fact, not. 

Once datasets are collected, we can consider a promotion/relegation system to try new options.  What I believe we’ve found as an industry is, as in most endeavors, when you have numerous competitors, they will always try to innovate and outperform. The same happens with our sell-side brokers. So, if you give them the potential opportunity to join something such as the algo wheel, or part automation process, they’re more likely to innovate.  Secondly, through automation, we are pushing brokers to be the best that they can be.

The changing equities marketplace seems to be a focus for this year’s conference, how can trading firms navigate changing market structure and price formation in this market?

Regarding market structure, we on the buy-side need to constantly be on the front foot about what’s happening. For example, as liquidity sources move and evolve from different venues, we need to be swift to track and acknowledge these changes in our technical infrastructure.  Another example would be navigating the new paradigm as the UK moves further apart from the EU in terms of regulation.  Generally, everything comes down to information and adapting to it as it presents itself. It is essential that we, as a firm, are navigating what is happening in the most proactive way.

In terms of price formation, again, you’ve got to constantly be evolving your processes to account for the latest changes. For example, over the last couple of years, we’ve seen liquidity moving between some of the larger liquidity sources. It is important to make sure that we are accessing the liquidity and prioritising the correct venues through your brokerage options. We need to work with our sell-side brokers to make sure they are sourcing liquidity in the correct venues in a timely way. 

How have you adapted your trading strategies to manage another year of potential uncertainty in the markets?

This year has already seen numerous global challenges, with the invasion of Ukraine the greatest for immediate impact. Although we didn’t see the same huge increased spreads and volatility that accompanied the 2020 outbreak of Covid, the February invasion caused increases in both factors, and with liquidity also reduced, the knock-on effect has been execution cost rising. We will also face challenges later in the year as the consequences of the war begin to feed through into financial results and I see potential large daily moves in individual stocks in H2.

In such circumstances, all trading desks will have to be dynamic in how they handle flow and we are the same. When dealing with larger orders, we must be cognisant of the fact that liquidity offering from market makers may be lower than it was (as they shield themselves from volatility), though from our perspective this is not something we have yet to see. It is important to build parameters into these orders to avoid the worst of the volatility.

For algo trades, we already have tight constraints in places and regularly monitor for underperformance.  That said, we continue to evolve these strategies as required when faced with a changed environment. Adaptability is key.