US institutional investors have cut back on electronic trading and pushed more deals through high-touch broker sales desks over the past year, according to research from Greenwich Associates.
The analyst house found that electronic trading channels captured 34% of institutional trading volume in US equities between 2010-2011, down from 38% in the year ealier period. Algorithmic trading was the only type of electronic execution channel to hold its ground during the year.
Greenwich attributes the shift to a surprise decline in trading activity - reducing the amount of commission available to brokers, and allocated by institutions for the acquisition of sell-side research. Brokerage commissions paid on trades by the 525 institutions studied by Greenwich decreased 12% from Q1 2010 to Q1 2011 to an estimated $11.55 billion.
With the amount of commission dollars on the wane, reasons Greenwich, institutions shifted their trading activity to more expensive human channels to ensure that providers of essential research and advisory services get paid.
"There is no doubt that institutions remain fully committed to electronic execution as a means of lowering costs, and we expect institutional trading volumes to begin flowing back to e-trading systems when volumes pickup," says Greenwich Associates consultant Jay Bennett. "But the shift back to traditional high-touch - and higher cost - trades last year shows just how essential sell-side research/advisory services are to the institutional investment process."