21 October 2017

Canadian buy-side firms switching to e-trading

28 July 2006  |  4400 views  |  0 laptop

Institutional equity investors in Canada have been slower than their US counterparts to embrace dealing technology, but many Canadian buy-side firms are now gearing up for a "significant" move into electronic trading, says Greenwich Associates.

The survey of 85 portfolio managers and 70 traders at buy-side institutions found that Canadian firms directed less than a quarter of their overall equity trading volume to electronic and portfolio trading systems between 2005 and 2006.

But when asked how much of total trade volume they would be directing to these systems in three years time, the typical Canadian institution gives an estimate of one-third — a share that would match current electronic and portfolio trading levels in the US.

Currently almost two-thirds of Canadian institutions use self-directed electronic trading for some portion of their equity business. Greenwich says the typical institution executed 15% of its total trade volume as self-directed electronic trades — either with or without algorithms — and nine per cent as portfolio trades during the 12-month period ending February 2006. This 24% total that was virtually unchanged from 2005.

Over the same period, the typical US institution did 24% of its equity trading business via self-directed electronic single-stock trades, up from just 18% the prior year, and conducted another nine per cent of business via portfolio trading systems.

"Our research suggests that the migration of trading volumes from traditional 'high touch' executions to electronic and portfolio trading, which has been a gradual process up to this point, is already accelerating and will speed up even further in coming months," says Greenwich Associates consultant Lea Hansen. "Indeed, among the largest and most actively trading Canadian institutions, the proportion of total volume done through self-directed electronic trades jumped from 5% in 2005 to 26% in 2006."

Greenwich electronic trading among Canadian institutions might be approaching a tipping point. By 2009, the typical institution expects to be doing eight per cent of its total trading volume through algorithmic trades, 12% through non-algorithmic direct-to-market trades, three per cent through crossing networks and 10% through portfolio trading systems.

This shift will result in considerable cost savings - the research shows that commission rates on self-directed electronic trades have fallen from nearly three cents-per-share in 2002 to just 2.2 cents-per-share in 2006. Institutions generating more than $10 million in annual equity brokerage commissions are now paying only 1.7 cents per share on their self directed electronic trading business.

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