Demand for custom algos shows rapid evolution of equity trading - Greenwich Associates

Source: Greenwich Associates

Nearly half of institutional equity investors globally are expected to ask their brokers for customized algorithms next year—a percentage that shows just how fast equity execution technology is evolving, and how hard brokers must work to keep pace.

Until recently, there was a perception that trading algorithms were commoditized products. There was some truth to this belief, since algos were using similar logic, and because many brokers were “white labeling” the same algos from bigger brokers. To combat this complaint, brokers have increasingly focused on providing bespoke algorithms to their clients, and more than 94% of electronic trading executives say customization is an important part of their service model.

“Today, armed with new insight and analysis, buy-side traders have a much clearer view about the types and timing of strategies they want to use, the order types that work best and the venues they want to access,” says Richard Johnson, Vice President of Greenwich Associates Market Structure and Technology and author of The Evolution of Equities Sell-Side Execution Technology.

“All of this places an increasing demand on the broker to accommodate their clients’ order-handling requirements.”
Although buy-side traders are still routing a large proportion of their order flow via the high touch channel, most of the time these high touch orders are worked by sales traders using their algo desk's offering.

“As result, Greenwich Associates estimates that 73% of global equity flows are executed electronically,” says Richard Johnson.

“This data point includes some less-developed global markets and for more liquid, developed markets the rate is likely over 90%.” This further underpins the importance for the sell side to have a robust, performant and flexible electronic-trading infrastructure, even where e-trading isn’t a core part of their client offering. 

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