A study from Bloomberg has noted increased performance and reduced trading costs for equity trading desks using its multi-asset automated trading solution, Rule Builder (RBLD). BEST EXECUTION spoke to Ravi Sawhney, global head of trading automation and execution analytics, to learn more.
Stating that “the impact of automation on trade execution performance has been underexplored”, Bloomberg analysed the performance of firms using RBLD in the US and European equity markets using its Transaction Cost Analysis (BTCA) solution. Anonymised data covering 23 million orders between 1 January 2022 and 31 December 2023 was considered.
The arrival price or Implementation Shortfall benchmark of trade executions were analysed, normalised by the weighted average based on each trade’s notional value in USD.
Outperformance
Combining automated and manual orders, the study showed that European equity trading desks using RBLD saw a 36% increase in overall performance (combination of automated and manual orders) compared to manually-trading firms. In the US, a 30% difference was recorded.
“While the industry understands there are a number of advantages to automated trading, this study was able to take a deep-dive into the data to help us identify and really pinpoint where clients are realizing those benefits,” Sawhney told BEST EXECUTION.
“It showed that clients are focused on managing costs while delivering on best execution requirements, and that automation helps them achieve both those goals.”
High v low
Equity trade orders using RBLD outperformed manual orders by 38% in the US and 68% in Europe. The results suggest that RBLD could help to automate “no-touch, repetitive orders that offer little to no opportunity for a trader to gain execution alpha,” while the report also suggested that integrating RBLD and BTCA could be used to create benchmarks to measure the performance of automated workflows.
When analysing orders based on size compared to the average daily volume, the study found that orders using RBLD in US equity markets outperformed manually routed orders by 25% (0-0.5% ADV), 35% (0.5-1% ADV) and 47% (1.0-2.0% ADV). In Europe, outperformance was seen at rates of 51% (0-0.5% ADV), 39% (0.5-1% ADV) and 84% (1.0-2.0% ADV).
Volatility and cost
RBLD also performed consistently better than manual orders across various levels of volatility. “Data suggests that automated workflows are beneficial not only for securities with tight spreads and low ADV but also for those with wide spreads and low ADV,” said the report. Overall, the study noted a reduction in performance variation and improvements in both the prediction and management of trade costs with the use of RBLD.
“We certainly expect to see significant growth in the use of automation, as firms look at the data and are able to identify the benefits of trading this way,” said Sawhney. “So, firms that currently automate trading will likely expand their use of automation, and others that have not yet automated their trades will look to do so, as firms look for ways to generate alpha for their clients.”
Future prospects
“Automation enables firms to systematically apply a consistent workflow to similar orders, which helps make the trading process more predictable while enhancing performance and managing costs. It is well understood and accepted that the application of automation on the trading desk can yield productivity benefits.
“What is truly novel about this study is that in addition to that, we are seeing real outperformance with regards to trading costs. Looking not so far down the road, the thoughtful and considered use of AI techniques to the execution workflow should only further both the gains in productivity and improve adherence to best execution.”
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