What are the responsibilities of AT firms?

People involved in AT now have both internal responsibilities to their firm and its profitability and external responsibilities to ensure the safe operation of their systems.  What’s problematic is that there are many different, and often competing, views on what the responsibilities are or should be in AT.

AT is an interdisciplinary endeavor requiring the input of traders, computer engineers, and quants.  Each of these disciplines has its own perspective. Traders, for example, often take seriously their principal function and obligation to maintain orderly markets.  Computer engineers have their own codes which require avoidance of unsafe practices and fail-safe design.  (These concepts are most often embedded within the topic of software quality.)  Responsibilities in quantitative analysis revolve around staying within the strategic bounds defined in exchange rules and government regulation and, furthermore, are largely thought to be superseded by adherence to mathematical truth.

Additional perspectives are added to the AT sphere by people and organizations outside the AT firm as well.  The exchanges have their perspectives, and certainly, as do people in different parts of the world.  The following figure shows the perspectives involved in AT:

These perspectives may sometimes be in conflict with each other.  Thus, different AT firms may recognize different responsibilities based upon the internal political dominance of one profession.  No framework exists in AT that considers cross-disciplinary responsibilities of safety to those who might be harmed—external market participants and society.  The new discussion needs to focus on organizational responsibilities.  Likewise, as the global trading network spans multiple AT firms, exchanges and countries, it is important also to consider the industry-wide obligations to create confidence in financial markets and their sustainability. The profitability of any individual firm cannot be more important than the safety of the global trading mechanism.

Is automated trading ethical?

Financial markets enable price discovery. Price information and price discovery are generally considered to be good for the public.  As most AT systems make use of limit orders, they provide liquidity to financial markets.  Limit orders add information to the market.  AT systems add to price information and, therefore, price discovery. Several academic studies show that AT increases liquidity and decreases volatility.  Thus, this activity cannot be construed as inherently unethical.

Rather than the ethics of AT, AT 9000 consider ethics in AT.  By ethics we mean those standards of conduct that apply to AT firms, and the primary ethical component is responsibility.