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The Future of Block Trading

Traders Magazine, March 2005

Peter Chapman

The pace is slowing, but the volume of institutional order flow bypassing block desks at U.S. brokers continues to grow. That's the upshot of a new TowerGroup report about trends in direct market access. Tower estimates that one-third of institutional volume was traded via front-end systems last year. That's up from 11 percent in the first year of the decade. That's not good news for brokers. They've been able to fashion DMA as a service by virtue of their memberships on Nasdaq and the various exchanges and by providing the software. But commissions are low. DMA trades earn them only a penny per share versus a nickel for traditional worked orders. The numbers look even worse when algorithmic trades are included. TowerGroup estimates that another seven percent of share volume is flowing self-directed through brokers' algorithmic trading servers. Tower counts those trades separately because the commission structure is different. Self-directed algorithmic trades earn brokers two cents per share.

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