A surge in algorithmic trading helped drive a significant increase in U.S. equity trading volumes executed via electronic platforms last year, according to the result of a Greenwich Associates study. “After a chaotic period in which algorithmic trading strategies performed poorly and lost institutional equity trading volume to other methods of execution, algo trading came back strongly in the 12 month period covered in our research,” stated Greenwich Associates’ consultant Jay Bennett.
Overall, the proportion of U.S. equity trading volume executed electronically increased to 36 percent in 2008-1009 from 32 percent in 2007-2008, according to Greenwich Associates’ 2009 U.S. Equity Investors Study, which attributes the shift to a pick-up in algorithmic trading. More than three-quarters of all U.S. institutions and 95 percent of the largest and most active institutional traders use algorithmic trading strategies, which currently account for about 18 percent of overall U.S. equity trading volume. Institutions that employ algorithmic trades employ these strategies for 23 percent of domestic trading volumes, up sharply from 17 percent in 2007-2008. These institutions expect algorithmic trading to grow to 27 percent of their trading volume by 2012. Banks are predicting that they will be executing 33 percent of their trading volume through these strategies by that time.
The renewed growth in algo trading seems to becoming at the expense of direct market access smart order routing trades (DMA), which declined to 58 percent of institutions in 2009. The share of total trading volume executed via DMA declined to 13 percent in 2008-2009 from 16 percent the prior year, according to the Greenwich study.
Algorithms lacked a pattern of historic data that could accommodate the unprecedented levels of volatility experienced in late 2008 and 2008, according to Greenwich Associates Consultant John Colon. “But many algorithms have now been redesigned to take the new data patterns into account, and institutions are once again embracing them,” stated Colon in the release summarizing the report.
Meanwhile, institutions are moving slower when it comes to dark pools and crossing networks, according to the study. Dark pools and crossing networks captured a flat 13 percent of trading volume in 2007-2008 and 2008-2009, and proportion of institutions using these systems remained steady at 73 percent.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio