FLASH FRIDAY: The Long Road to Commerce Automation

FLASH FRIDAY is a weekly content series about the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura Company.

The use of computer programs to create buy and sell orders and route them to market centers for execution is strictly for 2022 institutional trading desks.

Old hat. Ordinary. Boring, even.

It has not always been so.

A 1998 Traders magazine article, “For Your Eyes Only: In Undercover World of Intelligence, Agency Desks Utilize New Technology,” shows that automated trading was cutting edge at the time.

The story begins by comparing a proprietary trading firm’s use of “intelligent trading” – a term that was apparently very short-lived on Wall Street – to James Bond leading international espionage.

From the article: “Recently, a number of trading companies have used intelligence software to trade stocks on an agency basis.

“Agency trading will have to follow this path,” said Dr. Mark Gimple, managing director of quantitative methodologies at Reynders, Gray & Co., a New York-based institutional agency trading firm. “Investors are looking for liquidity all over the world, and they will need this technology to find it.”

The 1998 article went on to say that Gimple had created its smart trading system at an initial start-up cost of $400,000 ($696,000 in 2022 dollars). It was intended to mitigate the impact on the market and had a capacity of 6,000 client orders per day, solely on stocks listed on the NYSE. “Nasdaq orders require a bit more human attentionwas the reason given for the limited universe.

More from the 1998 article:

“The system tracks multiple sources of liquidity and accurately projects when the volume of certain stocks will increase.

When the office receives an order from a client of a pension fund, trust fund, institution or broker, Gimple or a Reynders Gray trader will give the client an initial market assessment, in hoping to get an idea of ​​what the client wants the order to trade. Some orders may need to be negotiated quickly, others may be spread over several days. Based on the client’s instructions, the office will enter the order for execution within a certain time frame.

The desk then enters the order into the system, providing the system with a designated price range and execution time. The system will execute a command within the designated parameters when it predicts that the volume will reach its maximum.

Reynders Gray was indeed an early mover in e-commerce, since of the average 1.5 million shares on its desks each day in 1998, nearly half were executed through the trading system, according to the item. This was back when e-commerce as a whole was still in the single digit percentage of industry-wide commerce.

But markets have evolved rapidly, and what was cutting edge 24 years ago would be considered caveman today.

In a commentary on Traders Magazine earlier this week, KBC Asset Management’s Peter van Vught said his firm had automated 95% of stock order flow – with the remaining 5% handled in a highly tactile manner. In another article, Quentin Limouzi of the London Stock Exchange Group noted that automation extends its reach from routine day-to-day transactions to more complex ones.

Where is commerce automation headed in the next 24 years?