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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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September 30, 2004

The Explosive Growth In Algorithmic Trades

By Gregory Bresiger

In two years, algorithmic trading volume will double, comprising some 27 percent of U.S. equity flow, according to a study by the TowerGroup. The research organization said that the changing nature of markets is why this kind of trading is more popular.

"Fragmentation of liquidity and lower commission price points are driving the buyside towards the use of algorithms," says Gavin Little-Gill, a senior analyst in the investment management research service at TowerGroup. He also says that, "Institutional brokers are looking to the same tools to lower their trading costs to support those reduced commissions."

Buyside initiated use of algorithms will triple by 2006, the TowerGroup also predicted. And that means, TowerGroup said, that there will be increasing need for traders with mathematical and programming skills.

The TowerGroup defines algorithmic trading as "taking a buy or a sell order of a defined quantity, and placing it into a quantitative model that automatically generates the timing and the size of orders based on the specific goals of the algorithm."