2000-2009: The decade of electronic trading

Whatever else its legacy might be, the noughties was a decade that revolutionised how the buy-side executed trades in the global equity markets. To put the scale and nature of the shift from voice-broked to electronic trading into context, theTRADEnews.com asked six influential industry figures to chart the milestones reached and the benefits achieved, as well as the challenges to come.
By None

Whatever else its legacy might be, the noughties was a decade that

revolutionised how the buy-side executed trades in the global equity markets.

To put the scale and nature of the shift from voice-broked to electronic

trading into context, theTRADEnews.com asked six influential industry figures

to chart the milestones reached and the benefits achieved, as well as the challenges

to come.


buy-side trader

Steve Wood, global head of trading, Schroder Investment Management

How did 2000–2009

change trading for the buy-side?


Steve Wood, the past decade has seen a “radical” change in the working

practices and the skill sets of the buy-side trading desk. At the beginning of

the decade, it was still possible to hand off a trade to a broker and spend lunchtime

down the pub until fills were reported back in the afternoon. Today, the

buy-side trader exercises considerably more control and judgment.


2000, Wood was head of trading for J.P. Morgan Asset Management in London and also had

responsibility for the firm’s Asian trading operations. The firm had already adopted

FIX to communicate with brokers and Wood sees widespread use of the protocol as

one of the key milestones of electronic trading. “FIX allowed us to seamlessly

launch program trades from our order management system (OMS) direct to the

brokers’ trading tools and then receive execution data back. This was also a

great leap forward from faxing over a list of stocks to the broker for risk

programs, not least because they used to build into the spread the potential

cost of the delay incurred in that process,” says Wood.


also identifies the introduction of broker-neutral and multi-broker trading

systems for the buy-side around five years ago as a “quantum leap” that

increased the choice at the trader’s disposal. “Whereas you might have had

access to ten algos from two providers, of which maybe three algos were in

regular use, a multi-broker execution management system offered access to a

wealth of riches,” he says. “It was not viable to have multiple front-ends on

the trading desk, from either the user’s and provider’s perspective, but now the

trader has to be able to choose from up to a hundred algos from a whole range

of brokers.”


trading had initially helped buy-side traders to improve the execution quality

they could achieve in trading baskets of stocks, observes Wood, but this has

been supplemented by increased single-stock capabilities in the past three


What has electronic trading

brought the buy-side so far?


views the benefits of electronic trading in terms of choice, control and

reduced market impact. “Rather than relying on the broker’s expertise on how

best to interact with a primary exchange, now our traders have the skills to

execute in a much more fragmented market,” he says. “High-touch services from

brokers are still highly valued; they can often access liquidity that we are

unable to reach ourselves. But a broker is just one venue now. We can access

the venues, the multilateral trading facilities (MTFs) and dark pools ourselves

and our visibility in the market is our responsibility.”


is no doubt in Wood’s mind that electronic trading has helped the buy-side to

reduce transaction costs to the benefit of the end-investor. “A substantial

amount of our trading is done in low-touch arenas now,” he says. “That reduces

commission costs of course, but the more important factor to reducing overall

transaction costs is the ability to control order flow.”

What can it help the

buy-side achieve in 2010 and beyond?


great improvements in the cost-effectiveness of buy-side trading may have been

achieved in the past decade, traders like Wood are discerning purchasers that

continually expect more from their sell-side counterparts. And as fragmentation

increases, that means demanding greater transparency and execution quality from

smart order routers (SORs). “We ask brokers how exactly their SORs interact

with the market,” explains Wood. “Do they reach all the right venues in the

right sequence or are they missing out on some, either because those venues

don’t have the necessary volume or because it’s not cost-effective for the

broker? Does the SOR preference a market that is cheaper for the broker to deal

on or does it go for liquidity?” A better understanding of how SORs will lead

directly to a further reduction on transaction costs, suggests Wood. “We want

to see what percentage of a transaction is executed on each venue so that we

can evaluate the transaction cost per exchange and then direct more flow the

cheaper venue,” he says.



Richard Balarkas, CEO, Instinet Europe

How did 2000–2009

change trading for the buy-side?


senior managers at banks didn’t see any upside or revenue potential in electronic

trading. But they were worried that they would lose clients if they couldn’t

take orders by FIX." This was the situation facing Richard Balarkas as

newly appointed global head of electronic trading at Credit Suisse at the turn

of the century. Credit Suisse had bought BZW from Barclays and wanted to

replicate the UK

firm’s success in automating equity trading for the retail investor at the

institutional level. The way to achieve this was unclear until Balarkas was

introduced to one of Credit Suisse’s New York-based prop traders, Dan Matheson.

Matheson was using rules-based programs or algorithms to execute his trading

strategies more efficiently.


meeting led directly to Credit Suisse developing its Advanced Execution

Services business as the first major brokerage to offer algorithms directly to

the buy-side. It took a matter of months for some fairly rudimentary algos to

be developed for internal traders to test, and before long firms such as Putnam

Investments were demonstrating the benefits to rivals and competitors. "If

we’d have only allowed access via sales traders or just provided DMA there

wouldn’t have been the same kind of growth,” asserts Balarkas. “It was a huge

cultural shift for a bank to provide that kind of service. There were real fears

about cannibalising revenues."


Balarkas’ view, the availability of electronic tools such as execution

algorithms helped to usher in a new era of professionalism on the buy-side

trading desk. "It signalled the death of the dealer that just outsourced

all risk and responsibility for the trade to the broker and heralded the

arrival of the buy-side trader that could take full control of the trade and be

a more discerning buyer of sell-side services," he notes.

What can electronic trading help the

buy-side achieve in 2010 and beyond?


revolution in buy-side trading capabilities that electronic trading has

supported is far from complete, according to Balarkas. For every firm that has

invested in technology to enable traders to reduce transaction costs, there are

plenty that believe that investment is unwarranted, or at least of secondary

importance. "A lot of buy-side desks are not proficient in execution and

are not autonomous because their portfolio managers do not realise the impact

execution can have on portfolio performance,” says Balarkas. “Those funds are

missing a trick."


trading venue operator

Peter Randall, CEO, Equiduct

How did 2000–2009

change trading for the buy-side?

Peter Randall has been at the heart of a number of the key developments

that made 2000-2009 the decade of electronic trading. After a period as

executive director of FIX Protocol Ltd, he took on the role of director of

business development at Instinet Europe, the agency brokerage that gave birth

to the first successful pan-European trading venue in early 2007. Randall

became CEO of Chi-X Europe in December 2007 and oversaw a rapid expansion of

the venue’s market share before stepping down in the first quarter of 2009. In

2000, however, he was looking at electronic trading from a slightly different

angle. “I was working in Hong Kong helping to

quantify the size and dynamics of the Asian retail market for an

established stockbroker looking to provide an online service for retail

investors,” Randall remembers.

He believes that the development, adoption and effective

implementation of the FIX protocol has been the most significant driver of

electronic trading over the decade, but says that the changes wrought during

that period have gone well beyond financial messaging. “Electronic trading has

delivered significant liquidity advantages to the buy-side,” he asserts. “It

has also helped to systematise the entire dealing, settlement and

accounting process – issues that represent so much of the buy-side’s

cost base.”

What can electronic

trading help the buy-side achieve in 2010 and beyond?

With many of the building blocks of electronic trading now firmly

in place, the next decade should in Randall’s view be one in which the gains of

2000-2009 are truly exploited to the advantage of end-investors. “Much remains

to be done,” he acknowledges. “However, now that essential standards for

market data, trading, clearing, settlement, fund accounting and modeling have

been established, I expect to see a blossoming of innovation and product

development over the next 10 years.” And with faster innovation comes ever

fiercer competition. “There will be an ever increasing focus on the quality,

the market infrastructure and the costs of the services that the sell-side

provides to the buy-side,” says Randall. “As with all other

products, excellent quality at a competitive price coupled with great

service and innovation will set the standard.”




Hooper, executive

director, Pipeline Financial Group

How did 2000–2009

change trading for the buy-side?

As head of trading for AXA Investment Managers in 2000, Marcus

Hooper could already see that electronic trading would have “a huge future”. In

the late 1990s, he had been the first member of the Tradepoint Exchange, which

offered the first practical direct exchange membership to the buy-side

community. “Tradepoint didn’t succeed, but it definitely helped to change

the market,” recalls Hooper. “The London Stock Exchange wouldn’t have adopted

electronic trading so quickly without Tradepoint’s appearance.” 

Ten years ago, says Hooper, much of the buy-side community was

struggling to introduce technologies and processes considered fundamental

today, such as electronic order and execution management systems.  “Almost

everyone was looking to deploy a new OMS and the choice was very limited. Also

the functionality of most systems was often quite poor with very little

connectivity,” he says.

In more recent years, he identifies MiFID as a key milestone

because it put Europe on a common regulatory

basis, thus enabling new electronic systems to come to the market. “I think

we’ll see more consolidation in the electronic trading space,” Hooper notes,

“but without MiFID we wouldn’t have had the opportunity for these systems to

enter the market and compete in the first place.” 

What has electronic

trading brought the buy-side so far?

Growing buy-side side empowerment over the decade has given

traders greater freedom of choice and increased anonymity which, says Hooper,

has had a significant impact in reducing trading costs. 

But he suggests that electronic trading has delivered a

significant benefit that many may have forgotten about: a massive reduction in

trading errors. “Before electronic trading systems, most traders always had a

fear in the back of their minds that a giant trading error was waiting in the

shadows! The good news is that these events just don’t seem to happen

anymore – no trading the wrong stock, no buys instead of sells,” says Hooper.

What can it help the

buy-side achieve in 2010 and beyond?

But it hasn’t all been upside. Electronic trading has introduced

problems as well, according to Hooper, such as the reduction of order size in

the visible markets. “Trading large block orders is increasingly difficult

because the visible markets really don’t support price discovery

anymore. The prices that are discovered are all ‘at the margin’ in tiny

quantities that don’t represent anything like the full market supply and

demand,” he explains. “Large block orders take place away from the visible

markets even though they often rely upon reference prices from those markets.”

The result is that supply and demand from block orders neither interacts with

nor contributes to the price discovery process and Hooper suggests that technology

“can definitely play a part” in the resolution of this problem. 




Houstoun, chairman of Rapid Addition; co-chair of the global technical

committee of FIX Protocol Ltd.

How did 2000–2009

change trading for the buy-side?

The difference in client expectations since the start of the

decade is evidence of the distance buy-side trading has travelled in 10 years.

Kevin Houston was running the European equity electronic trading team at

Salomon Brothers in 2000, a market leader since developing FIX to communicate

with Fidelity Investments in 1992. “We

could deliver orders to many markets on a single platform and identified early

on the great potential for electronic trading to expand globally. Now, not only

is this expected functionality for any large broker, but people care how many

milliseconds, or increasingly microseconds, it will take. A decade ago, people

wanted global coverage; now they want high-speed global coverage,” notes Houston.


it had made its debut eight years previously, FIX was far from a ubiquitous communication

protocol in 2000, but Houston

says that’s just one of many step changes across the decade. “Algorithmic

trading techniques were being used by some specialist funds and proprietary

trading desks to make money; now they have been extended to also become

productivity tools used by the buy-side to place orders into the markets. Initially

they were premium services which justified near full-service commission levels

and now they have become just another discount commission channel that the larger

brokers are expected to have,” he says.  

What has electronic

trading brought the buy-side so far?


benefits of the growth in electronic trading can be seen in the reduction in

commissions and spreads, says Houston, who asserts that the trend is inexorably

downwards despite glitches caused by lower liquidity levels after the credit

crunch and – potentially – by regulators’ increased interest on high-frequency trading.

“This is probably the biggest direct benefit to the buy-side,” Houston comments, “but there are many others

as well, such as: reduction in errors; better risk systems; and algorithmic

trading tools as productivity tools that allow the buy-side to focus on the

larger / more difficult trades where they can add more value.”

What can electronic

trading help the buy-side achieve in 2010 and beyond?

Houston observes

that competition and innovation in the trading technology space has been harmed

recently by consolidation, notably among providers of FIX engines, but he

expects strong demand for software as a service and hosted FIX services.

He also forecasts that regulators will have a bigger role to play in how firms

trade, not least by demanding more risk controls for those currently enjoying

naked access. “Risk and regulation is going to be the next big thing that we

look back at in a few years; there are currently around a dozen and a half or

more pieces of legislation going through the US legislative process alone that

could have an impact on our business,” he says. “Looking back at say 2005 from

2015 I guess we’ll be saying "Wow, were we lightly regulated then!"’

The Consultant


Ponzo, managing director, Greyspark

How did 2000–2009

change trading for the buy-side?


10 February, 2000, Frederic Ponzo was taking the Eurostar train from London to Paris to

establish the UK

business of Net2S. For most of the next decade, Ponzo was overwhelmingly

engaged in helping sell-side and latterly buy-side firms develop their

electronic trading capabilities, in London

and beyond. In the early part of the decade, he was focused on implementing

direct exchange connectivity for banks as Europe’s

exchanges first automated then consolidated. By 2004, electronic trading was

beginning to be seen beyond cash equities and listed derivatives, and soon

platforms such as BrokerTec and Tradeweb were automating the request-for-quote

process in the fixed income market. “Around five years ago, spreads began to

tighten a lot, especially for smaller order sizes, as electronic trading in

fixed income increased competition between brokers,” says Ponzo. One reaction

to this increased transparency was the complexity of products offered by the

sell-side that resulted in credit derivatives that became all but impossible to

price. Back in equities, MiFID revived innovation in electronic trading,

according Ponzo as the pace of fragmentation and the growth of dark pools

surprised many. “The story of MiFID is not finished yet – no one is sure which

of the MTFs will survive,” Ponzo asserts. “Moreover, SOR was introduced on the

promise of reduced trading costs, but it has not delivered yet.”

What has electronic

trading brought the buy-side so far?


notable exceptions, the buy-side trader’s use of technology extended little

beyond emails and excel spreadsheets 10 years ago,” observes Ponzo, who

believes a shift in power between the buy-and the sell-side has been effected

over the past decade. “The growth of electronic trading on the buy-side has

demystified the business of brokerage,” he claims. “Empowering the buy-side to

take responsibility for their own trades has had at least three far-reaching

consequences: they have demanded better value-for-money from the sell-side;

they have taken ownership of their own technology; and they are achieving

greater transparency on price formation.”

What can electronic

trading help the buy-side achieve in 2010 and beyond?


the progress that has been made in individual asset classes in recent years, Ponzo

believes that multi-asset trading will be a lasting theme at the beginning of

the next decade. “Rather than the complexity and opacity that we saw a couple

of years ago, we will see increased interest in the ability to trade different

asset classes in a consolidated way, i.e. on a single platform. An emphasis on

simplicity will also improve transparency, add more pressure to brokers and

reduce operational risk. Wherever you can, do it yourself.”