Managed Funds Association (MFA) released a white paper discussing the benefits investors have received due to the growth of electronic and automated trading. The paper, “Trading in the 21st Century: An Investor Perspective,” takes an in-depth look at how automated trading has developed in recent decades and explores the important role technology and automated trading have played in decreasing costs and increasing market efficiency.
The paper provides historical background on the development of electronic trading and explains how trading algorithms are used by managers of private funds and institutional investors. Importantly, it dispels some commonly held myths and details how U.S. and European regulators have enhanced electronic trading regulations and closely oversee trading, including automated trading practices.
The following key takeaways provide a more detailed understanding of the impact automated trading has had on our markets, the benefits it has provided investors and current regulatory oversight:
- Automated trading has helped lower costs for investors. Before orders could be submitted electronically, investors had to rely on brokers for trading and liquidity. Execution fees were significantly higher, often making trading more cumbersome and expensive.
- Automated trading has made markets more efficient. New market structure regulations and the use of technology have worked together to enhance market liquidity and to lower transaction costs.
- U.S. and European regulators and exchanges have enhanced electronic trading regulations and closely oversee trading, including automated trading practices.
- The terms “automated trading” and “algorithmic trading” have become catchall terms. But it is important to understand that there are widespread uses for automated trading and not all automated trading is the same – therefore regulations should not be imposed in a “one size fits all” fashion.