Chapter 14 - Trading Technology and Prime Brokerage

Abstract

This chapter focuses on various effects of automated trading on primer brokerage. Trading and technology have led to several new developments such as direct market access (DMA) and algorithmic trading, enabling investment professionals to expedite the trade process. Electronic trading has reduced the amount of human interaction and radically changed the nature of the roles that the buy side and sell side play in the workflow. Brokerage firms increasingly use black box trading in the investment decision process, and mathematicians or “quants” have programs capable of analyzing large amounts of financial data, which allow them to profit from small gains made off brief imbalances in the market. The rise of black box trading has significantly increased the number of trades. A prime broker clears and settles trades, keeps custody, and lends capital against assets. Prime brokerage can benefit greatly from new technological enhancements such as trade automation and straight-through processing (STP). Hedge funds can appreciate real-time reporting when a trade is entered into a system and routed to another instantaneously. Trade automation can eliminate manual intervention in the back office, ensure automated trade affirmation, and reduce operational costs.