Direct Market Access (DMA) trading and automated order routing are forecast to grow strongly over the next two years as buy-side traders increasingly move towards low-touch channels, according to a report by Tabb Group.
Noting that the move toward advanced execution will start with the most fundamental tool, Tabb Group projects that Direct Market Access (DMA) usage will more than double over the next two years to constitute more than 11% of order flow. The research house also predicts a tripling in the volume of trades pumped through electronic execution systems by 2007.
The world's largest investment banks have been snapping up vendors of automated dealing systems as they look to beef up their technolgy prowess in anticipation of a buy-side move to electronic dealing systems.
"Migration to low-touch channels is in its very early stages," says Tabb Group partner Robert Iati. "But there is a big gap between actual electronic order flow and the desire on the part of traders in those regions to see it move more quickly."
Tabb Group interviewed 81 head traders at buy-side firms around the world and found that 93% of orders continue to flow through either phone or FIX to the sales desk with seven per cent going to electronic channels of DMA, crossing and algorithms. Of that seven per cent, these channels were reported as "preferred" by 55% of traders.
The biggest uplift in electronic dealing is anticipated in Europe, where exchange consolidation and the introduction of a new regulatory regime under the forthcoming Markets in Financial Instruments Directive (MiFID) is expected to help centralise liquidity.