Buy-side traders were forced to cut trade sizes and slash the number of orders executed manually to cope with tougher trading conditions in the aftermath of Lehman Brothers’ collapsed 15 September, according to data from GSCS Information Services, a transaction cost analysis provider.
As the extreme volatility experienced across the world’s equity markets increased trading costs and risks, buy-side firms cut both order sizes and the time taken to execute orders. In the period from 1 July to 27 October, the average trade size for electronic trades fell by 47.5% and dropped by 45.4% for manual trades.
The fall in trade sizes has been accompanied by a reduction in the value of trades conducted manually as buy-side firms increase electronic execution to cope with the greater workload. In the period between 1 July and 27 October, the value of manual trades slumped by 54.4%. Because electronic trading allows firms to trade more orders more quickly to compensate for the smaller trade sizes, the value of electronic trading is almost unchanged over the period.
The number of trades executed manually has fallen by 16.6% over the period, while the number of electronic trades has jumped 94%.
“Electronic trading has allowed firms to reduce their risk profile without reducing the value of trading they can get done,” Robert Kay, managing director of GSCS, told theTRADEnews.com. “The market has adapted well to trading with lower risk.”
GSCS figures show that market conditions have deteriorated significantly for both manual and electronic trading strategies since Lehman failed. The week before the US investment bank filed for bankruptcy, GSCS’s degree of difficulty index, which measures the proportion of trades conducted when price movements – favourable or unfavourable – are greatest, had a value of 82.6 for manual trades, down from a starting point of 100 on 1 July. But on the week starting 15 September, the value jumped 71% to 141.2, and by 27 October had reached 176.3. The index value for electronic trading followed a similar trend, jumping 51% from 100.7 in the week beginning 8 September to 152.0 a week later, then climbing a further 21% to 183.9 by 27 October.