Large institutions are shifting trading volume to algorithmic avenues of execution as the overall commission pool remains flat, according to a new study from Greenwich Associates.
Greenwich Associates conducted interviews regarding U.S. equity investing with 223 U.S. equity portfolio managers and 321 U.S. equity traders between November 2015 and February 2016 and estimates the annual pool of cash equity commissions paid by institutional investors to brokers on U.S. equity trades to be $9.65 billion, down more than 30% from its peak in 2009. “While that may seem like a dismal figure, it is important to note that the 2016 level is about 4% higher than the low of $9.3 billion reported in 2013,” says Richard Johnson, Vice President in the Greenwich Associates Market Structure and Technology group, and author of the report entitled, Flat E-Trading Volumes in U.S. Equities Mask Increase Among Larger Accounts.
Some market observers have suggested the commission pool is shrinking due to increased use of low-cost execution channels. While the average share of U.S. equity trading volume directed to electronic channels including dark-pool sourcing algorithms or smart-order routing (SOR) algorithms has been flat at roughly 38% since 2009, the study data does reveal a meaningful pick-up in e-trading among the biggest institutional traders. The largest commission-generating accounts participating in the study increased their use of algorithmic trading strategies/SOR by almost 10% between 2015 and 2016.
When electronic trading started its rise two decades ago, many assumed that its growth trajectory would continue, with single-stock phone-based trading continuing to lose market share. However, in 2016 trades sent to high-touch sales traders continue to generate the bulk of the commission pool. “In a world where trading algorithms are considered commoditized, the human touch can be a differentiator,” says Richard Johnson.
Signs of Growth for Algo Trading
Although notional dollar volumes traded via algorithms have not topped 33% of total volume since 2012, recent bouts of volatility and the approval of IEX’s exchange application are likely to force a refocus on the use of algo-driven routing logic to help navigate an increasingly complex market structure.