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Automation is the substitution of self-operating machinery or electronics for manual or animal effort to support or control a broad spectrum of processes. Examples range from automatic teller machines, to robotic farm tractors, to securities transactions, and beyond. Henry Ford's use of the conveyor belt to produce Model T Fords in the early 1900s was a precursor to today's assembly lines that feature robotic assembly stations and automated inventory control, testing, and defect detection, all of which can be quickly reconfigured to accommodate variations of car models. Information technology is a form of automation used to process data, transmit information, or handle transactions, such as to order merchandise, buy or sell securities, or make hotel reservations.

Automation and the technology change that it represents have transformed economic arrangements and human lives in numerous ways. It has profoundly impacted production processes by increasing speed, accuracy, and sheer output volume, while eliminating some kinds of tedious, repetitive work. Automation that extends the reach of information transmission, processing, and control generates economies of scale that lead to firms being larger and allows production in more disparate regions, thereby increasing the intensity of global competition.

Automation has far-reaching consequences for employment opportunities. It generally substitutes for unskilled labor while complementing skilled labor. As such, automation results in the elimination or outsourcing of some jobs and the creation of new ones. As skill requirements change, members of the labor force must be retrained, and across the board, educational demands are raised.

Automation generally has positive impacts on productivity, economic growth, and the quality of life. It also has far-reaching impacts on the consumer side, lowering the prices of existing products and services, while increasing their quality, and creating entirely new products and services such as digital entertainment (CDs, DVDs, MP3s, etc.). Automation also increases the productivity of consumption within the home, contributing to the quality of leisure time. Examples are dishwashers, microwave ovens, and automatic lawn sprinklers.

Automation commonly involves the substitution of pre-specified, codified rules for human judgment. This might be fine during normal times, but anomalies can cause breakdowns, and under stressful conditions in particular, human judgment retains its importance. Automation duplicates human actions with machines and electronic technology, but when automated, tasks themselves can change. For example, many secretarial jobs morph into administrative functions in an automated office environment. Electronic technology can blur national boundaries and, in the words of Thomas Freedman, create a flat world. For example, a phone call from New York City to Akron, Ohio, can be routed through India without either party to the conversation knowing it. Automation can accelerate the speed with which events occur. While it is desirable to get tasks done quickly, production processes must be synchronized; thus timing must be coordinated, and speed can have negative consequences. Faster cars, for example, are not necessarily safer cars, especially if they are cruising down the highway at great speed. All told, automation presents new challenges to public policy and governmental regulators.

In recent years, automation has affected many industries in general and some in particular. One of the most important and complex industries, that involving the securities markets, has moved in the past quarter century from the horse-and-buggy era to the jet age. Equity markets are a good example.

In the early 1970s, equity trading was, for the most part, a manual, human-intermediated process. Orders were transmitted to brokers who physically met each other (face-to-face or by phone) to trade shares of a stock. Then, gradually, automation entered the picture. The first role for the computer was to deliver trading instructions and information about the prices (quotes) at which people were willing to buy and to sell, along with the prices and sizes of realized trades. In the United States, in 1971, the National Association of Securities Dealers introduced NASDAQ, its automated quotation system.

Then came automation of the act of trading itself. In 1977, the Toronto Stock Exchange introduced an electronic trading system. Over the following 20 years, European exchanges, from Stockholm to Madrid, including London, Paris, Switzerland, and Germany, replaced antiquated floor-based systems with electronic systems. In the United States, Instinet in 1969 and Archipelago in 1997 were among the first to introduce electronic trading. NASDAQ rolled out its own automated trading system in 2002, and in January 2007, the New York Stock Exchange (NYSE) substantially completed instituting its Hybrid Market, which combines an electronic system with its traditional trading floor. The replacement of manual broker/dealer intermediation functions with electronic systems owned by the exchanges paved the way for exchanges to convert their organizational structures from not-forprofit memberships to privatized, for-profit entities.

Automation in the equity markets facilitated the rapid calculation of price indices such as the Dow Jones Industrial Average and the S&P 500. Virtually continuous information about these continuously changing indices supported the trading of new financial products, such as index futures and options, and exchange-traded funds. Real-time index values are also valuable pricing guides for individual shares. Automated trading provides a faster, more error-free transmission of trade data into clearance and settlement, thereby increasing the efficiency of post-trade operations. The electronic capture of intra-day records of all quotes and transactions facilitated the overview and regulation of trading and enhanced academic equity market research.

Nevertheless, when it comes to equity trading, automation continues to be a challenge. Delivering orders to the market and reporting back quotes and transaction prices are the easy parts to trading; the difficult part is handling orders at the most critical part of the process, when buys meet sells and turn into trades. Trading involves more than simply transferring something (share ownership) from one participant to another at a pre-established price (as is the case when a passenger books an airline seat); it also entails finding the prices at which trades are made, a complex process referred to as "price discovery."

Automating the point of trade for small, retail orders (perhaps 1,000 shares or less) for big capitalization stocks is not difficult. A large trade (perhaps 500,000 shares), on the other hand, can be very difficult to handle. Time, skill, and risk taking are all required. The difficulty of handling large orders for all stocks, and all orders for mid and small cap stocks, explains in part why automation has proceeded slowly in the equity markets and why, as of this writing, the New York Stock Exchange still retains its trading floor.

In general, an electronic environment differs greatly from a human-to-human environment (either telephone connected or face-to-face), and replacing people with machines and computers is not necessarily a simple matter of having computers take over tasks that were previously performed by humans.

In markets around the world, human agents staunchly resist the introduction of electronic technology that, by automating activities, eliminates otherwise profitable jobs. Slowly, however, resistance may be overcome as the role of human agents is transformed.

Electronic information transmission is lightning fast; human-to-human information transmission is considerably slower but can include a broader spectrum of thoughts and emotions (a tone of voice or facial expression can itself convey important information).

Automation that enables people from disparate parts of the globe to access a market virtually instantly with virtually equal facility has flattened the world of trading and commerce.

In equity trading, automation has driven down commission costs, and volumes have exploded. Orders get delivered and trades executed within fractions of a second. However, the sequence in which orders arrive remains important, and sub-second time frames are of no substantive importance per se. Concurrently, large block orders are commonly being shot into the market in protracted sequences of smaller tranches. This practice of "slicing and dicing" and the speed with which events can happen in the automated environment have pressured traders to use new computer tools to time and otherwise handle their order submission. The automated, rules-based procedures, referred to as "algorithmic trading," are both a product of automation and a symptom of the complexities that electronic, high-speed trading can introduce.

Automation offers much promise and, driven by technology developments, impacts economic activities around the world. Automation is indeed a powerful tool, but it can also be a harsh taskmaster. Throughout history, and even today as seen in the equity markets, automation's introduction has rarely escaped controversy. Its transformative power disrupts the status quo and can create new sources of friction even with significant reductions in time, effort, and mistakes.

Bibliography:

1) Carlsson, B., ed. 1995. Technological Systems and Economic Performance: The Case of Factory Automation. New York: Springer.

2) Friedman, Thomas L. 2005. The World Is Flat: A Brief History of the Twenty-first Century. New York: Farrar, Straus & Giroux.

3) Loader, David and Graeme Biggs. 2002. Managing Technology in the Operations Function. St. Louis, MO: Butterworth-Heinemann.

4) Schwartz, Robert A. and Reto Francioni. 2004. Equity Markets in Action: The Fundamentals of Liquidity, Market Structure & Trading. Hoboken, NJ: Wiley.

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