Electronic equities trading has increased significantly in the US over the last year, driven largely by a sharp increase in algorithmic trading, according to the latest study from consultancy firm Greenwich Associates.
The proportion of US equity trading volume executed electronically increased to 36% in 2008-2009, from 32% in 2007-2008, according to Greenwich’s 2009 US Equity Investors Study.
More than three quarters of all US institutions and 95% of the largest and most active institutional traders use algorithms, according to Greenwich. The study found that these firms used algorithms for 23% of their domestic trading volumes in 2008-2009, up from 17% in 2007-2008, and expect their usage to increase to 27% of their trading volume by 2012. Banks in particular predicted that they will be executing 33% of their trading volume through algorithms by that time.
“After a chaotic period in which algorithmic trading strategies performed poorly and lost institutional equity trading volume to other methods of execution, algo trading came back strongly in the 12 month period covered in our research,” said Jay Bennett, consultant, Greenwich Associates in a statement.
The adaptation of algorithms to new market conditions fuelled the comeback. “Most algorithms lacked a pattern of historic data that could accommodate the unprecedented levels of volatility experienced in late 2007 and 2008,” said Greenwich Associates consultant John Colon. “But many algorithms have now been redesigned to take the new data patterns into account, and institutions are once again embracing them.”
However, the study revealed that some of the renewed growth in algorithmic trading has come at the expense of direct market access (DMA) trades sent via smart order routers. The proportion of institutions using DMA trades declined slightly to 58% in 2009, and the share of total trading volume executed through these trades declined to 13% in 2008-2009 from 16% the prior year.
US institutions are using electronic trading platforms as a tool for lowering equity trading costs in a challenging market, according to the study. Greenwich found that the average rate paid by institutions on DMA electronic trades dropped to 1.6 cents per share in 2009, from 1.7 cents in 2008. The market’s most active traders – those that generate more than $50 million in annual trading volume – paid slightly less (1.5 cents per share on DMA trades), while hedge funds paid the least (1.3 cents). Banks paid the most on average at 2.6 cents per share.
“With the average rate on a traditional high touch trade holding steady at about four cents per share, institutions have been able to use electronic trading platforms to drive down their average all-in blended commission rates and substantially reduce equity trading costs overall,” added Bennett.
Looking at other electronic trading methods, the study found that dark pool and crossing network growth stayed flat, capturing 13% of trading volume in 2007-2008 and 2008-2009, despite the being the subject of considerable attention over recent months.