Unprecedented change

In celebration of TradeTech’s 20th Anniversary, buy-side industry veteran and head trader for EMEA equities at Invesco, David Miller, explores the evolution of trading over the past two decades.

David Miller, head trader EMEA equities, Invesco

Over the past 20 years, I have seen unprecedented degrees of change in the industry from faxed confirmations and single screens to low-latency electronic trading and the onset of artificial intelligence. Soon after I joined the buy-side, just after the millennium, we moved away from directed orders to suggested, and then finally preferred brokers, all leading to more autonomy of the buy-side trader and the evolution of the high volume, technology based multi-asset trading desks we see today.

The empowerment of the buy-side trader has been the single most significant part of the trading revolution that I have witnessed over the past two decades. Coupled with increasingly complex electronic trading strategies, with ever more sophisticated post- and pre- trade analysis, the trading desk has found itself more firmly segregated from – yet still complementary to – the investment process.

With more recent regulatory change shifting decision-making to institutional traders, they have now become price makers, rather than the price takers of the past. This in turn has required traditional market making to adapt. Risk management has evolved, coupled with the evolution of the CRB (central risk book) to provide greater opportunities to the trader of today. This has led to ever more sophisticated interactions with different market participants, whether electronic liquidity providers, crossing networks or flow from retail investors.

Markets have become more and more fragmented. The need to be able to trade across asset classes has led to institutional traders becoming better educated in technology and data analysis. It’s not surprising that we now see a proliferation of working groups, industry forums and conferences as we all endeavour to maintain the highest levels of knowledge and try to ensure we all have our say in shaping the future. Trading has become more scientific, but still there is a particular art involved in the execution of an order.

One aspect of the automation we now utilise is the ability to isolate and execute different types of flow. For example, low ADV (average daily volume) orders can be traded on an ultra-low touch basis and at lower execution rates, allowing the trader to better use their skills and time on the harder to trade orders.

Fragmentation is not new, it would be remiss of me not to go back to the mid-1990s and the evolution of one of the first order driven exchanges, Tradepoint, a fully-regulated exchange that sought to introduce the concept of order-driven trading to a quote-driven, centuries old trading environment. Prior to that, I also remember a time where there were regional stock exchanges, Birmingham and Glasgow to name just two, with trading, often arbitraging in the same stocks between centres conducted by telephone, and fax, with ticker tapes publishing prices. This is very different to the low-latency, high-frequency messaging and trading of today. Today’s trading desktop is a far cry from the simple workstation of the past, order management systems, execution management systems, messaging services and ever more sophisticated price discovery tools all vie for the trader’s real estate.

One of the biggest drivers of change that I would identify has been the move to unbundle research payments out from trading commission, and latterly to the investment companies themselves paying hard for the research they consume.

Identifying trading costs, and the value, and therefore price paid, for written research has enabled a clear focus on the cost to the client of the entire investment process. Trading desks on both the buy-side and sell-side have become quantifiable profit, and loss centres in their own right.

The relationship between both sides of the trading equation, the institutional trader and the sales trader, has evolved to become far more of a partnership. This is hardly surprising given the proliferation of trading venues to which the buy-side has direct access making the search for intermediated liquidity more specialised and focused. This in turn has led to the inevitable restructuring of the process, not that we should write-off the traditional role of the stockbroker. Many funds invest in less liquid, smaller companies that trade in a more specialised manner, it’s this important area of the market where the ability to source hard to find liquidity is crucial to an efficient market.

Aside from the evolution of the crossing networks, other new industries have also appeared, such as the ongoing analysis and interpretation of trade data coupled with the use of artificial intelligence to assist in trading decisions. The importance firms place on this data, whether it is provided externally or processed in-house, plays a major part of the future shape of the trading desk.

Finally, since writing this the world has changed almost beyond recognition. The onset of, and ensuing restrictions associated with COVID-19 have had a significant effect on the working practices of the equity trading desk, and in fact the entire investment process as a whole. Despite early scepticism surrounding the ability to perform in the same way as we did when embedded in a busy trading desk, secure and robust technology has made the process virtually seamless. Regular use of Skype, Zoom, and other messaging systems have ensured that communication, which is one of the key components of the trading process, has continued almost uninterrupted.

The buy-side trading desk of today has come a long way in the past 20 years, but the focus on getting the best available outcome for clients has never been more important. The destination remains the same, we’re just all driving faster and more complicated cars!