By the end of 2011, trading technology will finally catch up to the telephone call.
An industry consultancy predicts that for the first time, the volume of shares that buyside traders send to sales desks and to the equities markets using algorithms will be the same.
Buyside use of low-touch algorithms to trade will rise to 35 percent of volume next year, according to TABB Group estimates in its latest study, U.S. Equity Trading 2010: Low Touch Trends. Simultaneously, it estimates buyside use of high-touch sales trading will fall in 2011 to 35 percent of its share volume.
For low touch, that would be an increase of 21 percent. Currently, low touch accounts for 29 percent of all volume traded on the buyside. Conversely, high touch trades are expected to drop 10 percent. Currently, high touch accounts for 39 percent of all buyside trading volume, according to the report.
“It’s not surprising,” said Adam Sussman, a director of research at TABB and co-author of the report. “This is illustrative of the trends that have been occurring for a number of years.”
The report gave two explanations for its estimate. First, because buyside traders were pleased with their algo performance during the financial crisis of 2008-2009, they decided they could put greater reliance on electronic trading. And this happened at the expense of sales traders. Second, algos enable the buyside to handle more order flow than they could manually.
Greenwich Associates, another consultancy, arrived at a similar conclusion in a May 2010 report: Algo use continues to increase, sales trading continues to decline.
The TABB report also found that hedge funds and traditional asset managers hung tough and traded more in the second half of 2009 than did banks, market makers and independent prop traders. The buyside stepped up its trading in response to the stock market rally and the decline in volatility, the report wrote.
“You would think that with equity outflows, hedge funds and asset managers would become a smaller piece [of share volume],” Sussman said. “But what’s happened is that, relative to the rest of the market, hedge funds and asset managers have stayed in the market more than other participants.”
For its methodology, TABB spoke to 66 head traders at traditional institutional investment management firms with a collective $12.1 trillion under management. TABB also interviewed 57 head traders at hedge funds with an aggregate $182.1 billion under management.
