US Futures Markets: In the Crosshairs of the Algorithmic Revolution

The futures markets have a target on their backs, and a host of newer market stakeholders are taking aim. Beyond the demands of traditional futures players, electronic market makers, hedge funds, and long-only asset managers have been and will continue to forge strategies with futures woven into their core. Brokers, vendors and exchanges are meeting these accelerated demands with a spectrum of new solutions. While the outlook for overall futures volumes remains murky in the near term, the importance – and ultimately the volume – of futures trading among these non-traditional customer segments is set to grow over the longer term.

On the surface, the primary drivers of the current demand for futures trading capabilities include the need to discover new sources of theoretical alpha, more intelligent and efficient systems to capture that theoretical alpha, enhanced capabilities in risk management, and improved methods for transactional and operational cost containment. Process refinement and automation is at the heart of the response to each of these drivers. In fact, the revelation is that automation is not a mere enabler of growth, but its true source. Take a look beneath the surface, and to an increasing degree, technical leverage is the true source of profits.

Evidence of the speed and depth of the algorithmic revolution can be found in Chicago prop shops and elite East Coast hedge funds, where high frequency futures trading is already a mainstay, just a few years after such trading was even possible. High frequency trading epitomizes the current state of market automation. Additionally, many of the leading brokers have extended their execution algo suites and advanced technical infrastructures to the broader hedge fund community. The trade automation that is now firmly embedded in the futures markets will provide these markets with continued impressive growth, even in bearish markets.

However, more impactful than these trends is the expectation that traditional asset managers are on the verge of adopting automated solutions for accessing the futures markets. Unlike their more proprietary peers, these players will need to lean heavily on a short, but expanding, list of brokers capable of offering advanced algorithmic capabilities across asset classes, as well as vendors capable of seamlessly integrating futures algorithms with existing systems and ultimately a consistent, consolidated multi-asset market view.

As adoption of automated futures trading increases, overall global volumes in these markets will increase as well. This growth will come in four distinct forms: expansion of strategies, user base, and products, as well as greater focus on risk management.

How quickly and to what extent this growth will occur remains to be seen, particularly in the aftermath of historic market dislocations. However, since trade automation is fast becoming a competitive necessity for all players and achieving consistent risk-adjusted returns remains a perpetual challenge, the inclusion of futures as a broader mainstream asset class is inevitable, and the use of algorithmic methods to navigate these markets is required. If the speed of automation adoption in futures to date is any indication, near-universal adoption of advanced execution algorithms should be complete in the next 3-5 years.

Since automation begets more automation, and speed begets more speed, there exists a gravitational pull from which we cannot escape. Given this momentum to explore the limits of automation and speed, one cannot help but wonder what happens when we get to zero.

The TABB Group Vision Note on the Global Futures Markets: In the Crosshairs of the Algorithmic Revolution

This 23-page report discusses how automated trading – via execution algorithms and other methods of alpha discovery – have quickly grown in futures markets, what these developments mean for market participants – from prop shops and other buysiders to brokers, vendors and exchanges, and what each of these stakeholders should consider for automated futures trading in the near future. The report also details how technical leverage is the true source of growth and profits in these markets, how “multi-dimensional” arbitrage enhances the diversity of futures markets, and lastly how traditional long-only asset managers are verging on algorithmic adoption that will solidify futures as a mainstream asset class over the next 3 -5 years.