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

Using computer programs to create buy and sell orders and route them to market centers for execution is de rigueur for institutional trading desks of 2022.

Old hat. Commonplace. Boring, even.

It wasn’t always that way. 

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

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

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

“Agency trading will have to go this way,” said Dr. Mark Gimple, managing director of quantitative methodologies at New York-based Reynders, Gray & Co., an institutional agency-trading firm. “Investors are looking worldwide for liquidity, and they will need that technology to find it.””

The 1998 article went on to state that Gimple created his intelligent trading system for an initial start-up cost of $400K ($696K in 2022 dollars). It was meant to lessen market impact, and it had capacity of 6,000 client orders per day, in NYSE-listed stocks only. “Nasdaq orders require a little more human attention,” was the reason given for the limited universe.

More from the 1998 article:

“The system keeps track of multiple liquidity sources and accurately projects when volume in certain stocks will rise.

When the desk receives an order from a client at a pension fund, trust fund, institution or from a broker, Gimple or a Reynders Gray trader will give the client a first assessment of the market, hoping to get a sense of how the client wants the order to trade. Some orders may need to trade quickly, others can be stretched out over days. Based on the client’s instructions, the desk 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 time frame for execution. The system will execute an order within the designated parameters when it predicts volume will peak.”

Reynders Gray was indeed an early mover in electronic trading, as of the 1.5 million shares its desks averaged each day in 1998, almost half were executed by the trading system, according to the article. That was when electronic trading overall was still in the single digits as a percentage of industry-wide trading. 

But markets have evolved rapidly, and what was cutting-edge 24 years ago would be seen as caveman-like today. 

In a Commentary piece published on Traders Magazine earlier this week, Peter van Vught of KBC Asset Management said his firm has automated 95% of equity order flow – the other 5% is handled high touch by design. In another article, Quentin Limouzi of London Stock Exchange Group noted that automation is expanding its reach, from the routine everyday trades to more complex trades.  

Whither trade automation over the next 24 years?