By Rick Klink
2015 has been a watershed year in regards to the way financial markets are traded.
Computer automation has well and truly taken hold in most modern industries, automating jobs that have been long held by humans. This started way back in 1962 with the first computer powered industrial robots being introduced into production lines at General Motor’s automobile plant in New Jersey.
The decision made earlier this year by the Chicago Mercantile Exchange to fully computerise its open outcry system shows just how far computer automation has come in the trading business - in this case, it ended an era spanning 167 years!
Closer to home, we just passed the 25 year anniversary since the SEATS computer system replaced the Australian Stock Exchange’s open outcry system.
So where did all the trading activity go after the lights went out on the trading floors?
Back in the 1970’s, the NYSE and other exchanges started to computerise this trading activity. They bought the latest and greatest computer equipment, at great expense, to help process the rapidly growing number of trades being entered by clients. This was the beginning of the Algorithmic Trading era.
As can be seen in the chart below, algorithmic trading volumes have since grown rapidly, today representing over 85% of all trading activity.
As an example of just how expensive those computers were back then, the most sought after beast in the mid 1980s, for number crunching, was the Cray 2 supercomputer. It took up most of the room, weighed over 2.5 tonnes and cost over $US30m in today’s dollars.
Wind forward to today, thanks to the explosive growth in computing power best described by Moore’s law, where computing ‘power’ doubles every two years, we now live in an amazing world where a single Apple iPhone 5 delivers 2.7 times the processing power than the Cray-2 supercomputer had in 1985.
"Now any trader can buy a suitable computer and starting from their own home grown software"
This never ending drive to better, faster and cheaper has vastly democratised trading. While in the past, only large organisations could afford the infrastructure required to support trading, now any trader can buy a suitable computer and start placing trades using their own home grown software.
In regards to connecting to the markets, communications speeds are also rapidly growing with costs falling. The Australian National Broadband Network (NBN) is currently rolling out their network allowing a trader to connect via fibre optic cable to their broker at up to 100Mbs.
We are seeing the dramatic results of this technology advancement daily here at OpenMarkets. We constantly receive calls from organisations and traders wishing to connect their trading systems into our platform, via one of our Application Programming Interfaces (API).
Types of traders using API broking for automation
The requests we receive at OpenMarkets for our API broking services come from the following types of traders.
1. Individual traders
These are the professional traders developing software to automate their trading strategies. They can be part or full time, office or home based, trading anywhere between $10k to tens of millions per day.
Their trading strategies are many and varied, ranging from momentum, technical and arbitrage based. (Interestingly, many of the biggest day traders were employed/trained by the large Investment Banks that were forced to close down their proprietary trading desks post the Global Financial Crisis (GFC) as per the Volcker Rule.)
These types of traders are tired of sitting at their desks all day, often on their own, applying essentially the same techniques over and over. Automating part or all of their trading strategies will allow them to 1) spend less time in front of computer screens and 2) increase the speed of execution when a trading opportunity arises
Often they will have some kind of software development background themselves, already running programs in MS Excel or MS Access, or they have employed a developer to write the software/algorithm.
Generally this type algo software use our web-based APIs to execute trades. Where latency is of a critical nature, they can elect to run their software within our data centre. (Our core computing infrastructure is situated within the ASX’s primary data centre.)
Our order management systems ensures that client trades comply with Stock Exchange market integrity rules and our own business rules - ie clients can only sell stocks they own and that they can only use available cash to buy stocks,
2. Institutional Traders/Family Offices
Institutional traders can also connect to our trading infrastructure via our Financial Information eXchange (FIX) interface. They can connect via:
- DIrect connect
- Third party trading platform (Iress, Bloomberg etc)
3. Robo Traders
A rapidly growing market segment for Openmarkets is the Robo Advice market. Robo Advisers are focused on delivering cost-effective investment solutions to the broader market using algorithmically-based solutions that automatically 'manage' clients portfolios.
Their portfolio rebalancing engines connect directly into our trading engines to buy and sell stocks.
Typically we're seeing the use of passive ETFs in these automated portfolios, although the newer robos are integrating portfolios with broader asset classes.
In addition to leveraging our trading API’s. they can connect to our Account Opening API to automatically open an account for a client within our systems.
4. Independent Software vendors (ISV)
This category applies to software vendors working in the investment and trading space. Examples of these companies include portfolio management, asset management and risk management software vendors
These vendors are focused on providing more efficient workflow to their clients when it comes to trading capabilities.
5. Social Investing
Another very interesting trading API connection category that is (slowly) emerging from our perspective is that of social trading. This category works on managing the flow of trading ideas between investors of many and varied trading experience. Empirical research has demonstrated that this method can greatly assist average investors, who are often the losers in our current financial system, turn into winners.
To me, this approach to investing shows great promise going forward.
Better collaboration with machines will be the true secret weapon for traders moving into the future. Just imagine what trading could actually be like in the year 2045 if DARPA is right with their future vision and we can communicate with machines with our minds!
In the meantime, 2016 is sure to be an interesting year for our financial services industry, as the theme of innovation and automation takes centre stage. We expect to see API broking to be our biggest growth area at OpenMarkets, and will be sure to report on the innovations we're seeing in the New Year.