The buy-side trading desk continues to transform itself into a more electronic, automated and self-directed operation, but the spread of electronic trading is slowing, according to TABB Group. In addition, the adoption of low-touch trading likely won't meet previous projections, and future expectations are being tempered, the consultancy reports.
In its annual study of institutional equity trading in America, TABB Group interviewed 61 head traders at investment managers. In 2005 the buy side estimated it would allocate 17 percent of order flow to algorithms in 2007. But that projection fell to 16 percent for 2008 in this year's study.
Further, the last 12 months have seen just a 1 percent increase in algorithm use, to 12 percent of order flow allocation, according to TABB Group, which asserts that the drop reflects traders coming to terms with the reality that the amount of liquidity accessible through electronic means is not what once was expected. Liquidity controls and will continue to control the ceiling for electronic trading, TABB Group contends.
The research also notes the growing adoption of liquidity-seeking algorithms, which surged from a 16 percent adoption rate in 2005 to 46 percent in 2006, supporting the argument that where the liquidity goes, so too does the buy-side trader. <<<