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Algo revival powers surge in electronic trading volumes

21 July 2009  |  7358 views  |  0 Man writing graphs on glass wall

A surge in algorithmic trading helped drive a significant increase in the share of US equity trading volumes executed via electronic platforms last year, according to the results of Greenwich Associates' 2009 US Equity Investors Study.

Overall, the proportion of US equity trading volume executed electronically increased to 36% in 2008-2009 from 32% in 2007-2008 - a shift attributable in large part to the pick-up in algorithmic trading, says Greenwich Associates consultant Jay Bennett.

"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," he says.

More than three-quarters of all US institutions and 95% of the largest and most active institutional traders use algorithmic trading strategies, which currently account for about 18% of overall US equity trading volume. Institutions that use algorithmic trades employ these strategies for 23% of domestic trading volumes, up sharply from 17% in 2007-2008.

These institutions expect algorithmic trading to account for 27% of their trading volume by 2012, with banks predicting that they will be executing 33% of their trading volume through these strategies by that time.

At least some of the renewed growth seems to be coming at the expense of direct-market-access smart order-routing trades (DMA). 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.

"Most algorithms lacked a pattern of historic data that could accommodate the unprecedented levels of volatility experienced in late 2007 and 2008," says 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."

Institutions appear to be moving slower when it comes to dark pools and crossing networks. Although the proliferation of dark pools has been the subject of considerable attention over the past several years, dark pools and crossing networks captured a flat 13% of trading volume in 2007-2008 and 2008-2009, and the proportion of institutions using these systems remained steady at 73%.

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