High-touch and Low-touch Trading
The Transition from High-Touch to Low-Touch Trading is Slowing
High-touch (HT) and low-touch (LT) trading represent two opposing methods to executing trades in today’s financial markets. In high-touch trading, traders make decisions and execute orders, often via voice communication and manual execution. This traditional method relies on the expertise of the trader and the direct interaction and communication between traders. It was the predominant way of trading until around 2009 but has begun to play second fiddle as electronic and automated trading methods have become the norm.
Low-touch trading uses computer algorithms to make trade decisions and execute orders. Algorithms analyse market data and execute trades based on criteria set by traders. Low-touch trading methods are generally more cost efficient and provide quicker execution times compared to high-touch, making them increasingly popular. They play an essential role in today's trading landscape.
Electronic trading systems have increased the ability of market participants, regardless of their geographical locations, to trade with one another, this leads to more buyers and sellers and increased market liquidity which improves the efficiency of the markets. Additionally, the direct market access (DMA) system has allowed clients who are eligible to access markets directly, which means they can monitor order books and general market movements before dealing. Moreover, the shift to electronic trading has forced an improvement in regulatory compliance and market transparency. The result has been improved audit trails, automated documentation, and enhanced transparency.
These factors, combined with the pursuit of speed by high-frequency traders in an 'arms race,' have fuelled the transition to low-touch trading, which has been the defining trend in the trading technologies market within the past 15 to 20 years. HT trading systems, which were the default solution since the inception of mechanised trading, have experienced a significant downturn in usage since 2009. LT Trading has been transitioning from legacy and in-house-built technologies to vendor software specifically designed for this purpose, becoming the baseline, with HT trading now serving as a value-added service in many cases.
The industry has adopted a targeted approach to increase automation through the trading lifecycle and throughout the value chain. This transition has been prevalent among Tier II firms, which are increasingly moving away from modified HT trading systems to adopt fit-for-purpose LT solutions. As a result, LT trading and electronic Trading has experienced steep growth and high penetration across regions and types of financial institutions; it is now reaching almost universal adoption and a stabilisation of market growth.
Equities trading was one of, if not the earliest adopters of near full automation and electronification, thanks in part to the relative simplicity of equities trading compared to other asset classes like bonds and derivatives. This simplicity enabled the transition to electronic trading, facilitating market participants to benefit from near-instantaneous execution and increased liquidity.
Source: Flow Traders Data 2023
The stabilisation of the shift to low touch trading can be primarily attributed to the already high levels of adoption, particularly in developed markets, and to some extent in select emerging markets. Stabilisation of low touch trading has been consolidated by the shift toward recurring pricing models, accelerated by the adoption of Software as a Service (SaaS) deployment models, competition from new entrants and vendor consolidation.
Several factors have contributed to this stabilisation:
Already high levels of adoption: Across various asset classes and regions, the adoption of electronic and low-touch trading has reached a saturation point. Many market participants have already embraced these technologies to a significant extent.
The market has reached its equilibrium: Low-touch trading has become the dominant approach in most markets, but high-touch trading continues to have its relevance in specialised sectors, where users value the personalised bespoke approach.
Varied Preferences: Full automation has been achieved in many areas, but it may not align with the goals and strategies of all traders.
Illiquid Markets: In markets characterised and burdened by limited liquidity, low-touch trading may not be the most effective form of trading. High-touch trading can play a crucial role in such environments by helping find relevant counterparties.
Risk of Arbitrage: The universal takeover of low touch trading may call into question the efficiency of the markets. in some instances, low touch trading may be less efficient or detrimental to the market, specifically in the case of large or block trades. High-touch trading, although generally more costly to the client, can offer a premium service by facilitating trade implementation without significantly moving the market against the trader's position. This risk of arbitrage has played a role in the coexistence of both high-touch and low-touch trading approaches.
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