Algorithmic Trading and the Importance of the Human Touch

Machines may be taking over the world, but as far as the markets are concerned, humans are striking back.

Samantha Huggins is a sales trader at CitiGroup. She and other traders like her happen to be in demand because they are proving to be better than computer programs at trading big chunks of stock, known as block trades, according to an article published by Bloomberg today.

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Although finding a buyer or seller and completing a transaction on the phone costs more up front, Huggins says her 18 years spent navigating the markets has given her an edge in avoiding the pitfalls of letting some software slice the trade into tiny tranches over hours or an entire day.

Huggins, a managing director at the bank, said: “Ultimately sales trading reduces their trading costs. If it didn’t reduce investors’ trading costs, we’d be a bunch of dinosaurs.”

So far, their niche is resurging amid an onslaught of technological evolution. At banks such as Citigroup, the biggest clients are the ones wanting the human touch because they are getting bigger and therefore hold ever larger positions.

Risks

Handling large trades presents risks. Algorithmic trading programs try to avoid detection by drizzling out trades a little at a time, but traders have become deft at seeking out those patterns and can drive prices the other way.

A further risk is that news could break, causing a swing in the value of the stock before the transaction is completed. These risks are why big investors prefer to avoid expensive mistakes and are willing to pay higher fees to make a trade in one big swoop.

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Sales traders dubbed ‘high touch’ traders like Huggins specialise in those transactions. They are expected to be clued up on their customers, including what’s in their portfolios, how they like to transact and what kind of news is important to them.

They also know where to find counterparties. Global concerns such as Brexit have unnerved portfolio managers causing them to withdraw from the market at levels not seen in over 14 years. While an algorithm might not be able to find them, an astute trader might be able to.

Difficult to Trade

A further concern is the boom in passive funds, which according to traders, dry up trade opportunities. Some index funds primarily transact in closing auctions, which can make it more difficult to trade during the rest of the day.

Nick Wills, Citigroup’s Europe, Middle East and Africa head of equity platform sales, commented: “There’s a place for algos, but it’s not the only solution.”

A case in point…Deutsche Asset Management, which oversees $842 billion, takes pride in its electronic operation, but says about 65 percent of the firm’s trades by value still go through humans.

The firm traded more big block trades in 2014 than in the combined prior five years, according to Mike Bellaro, Deutsche Asset’s head of equity trading. Block trading grew by another $15 billion last year and the company had its best trading execution ever.

 

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