How do Trade routes work, I know systems have to be connected but does the system need special resources/ requirements? Also are they formed automatically?

There are two kind of trade routes: The first trade route is intra-empire and that just shares resources with other planets (giving their nice bonuses to the others in your empire) and those happen automatically. The second kind of trade route is inter-empire (and this is the one you buy upgrades for) and it is for getting science and dust from a friendly opponent (you must have offered peace), this is also automatic and the trade route will go to the most lucrative spot first (distance and trade add ons play a role here).

Ok thanks I was wondering about that too

Oh, I forgot to add that the intra-empire requires the system to be connected, but the inter-empire happens automatically when you go to peace with a race and have been to some of their systems. If you are at peace, but have none of their systems mapped, nothing happens.