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February 24, 2006

Growth of Buyside's Self-Trading: Expected to Moderate This Year

By Michael Scotti

Also in this article

  • Growth of Buyside's Self-Trading: Expected to Moderate This Year

The growth of electronic self-trading by the buyside appears to be slowing. A survey by Traders Magazine discovered most money managers do not expect to trade significantly more via direct market access this year compared to last. The findings are confirmed by electronic trading execs and analysts.

The four-question spot survey asked traders what they expected their desks' level of electronic trading to be over the next 12 months.

About 51 percent said they expected to "slightly increase" their electronic trading in 2006. More than one-third, 36 percent, said they expected no increase of electronic trading in 2006. Those who expected to "dramatically increase" their self-trading measured 7 percent. Those who expected to decrease their electronic trading came in at 5 percent.

The survey's results did not seem to predict huge growth in electronic trading during this year, experts agreed. However, some of these same experts predicted that there will be dramatic growth in the self-trading of equities in the near future-if not this

year, then it will occur in the following years. Issues like Reg NMS, which is forcing the NYSE to become more electronic, and the development of more sophisticated algorithms will push the buyside to trade a greater percentage of its orders electronically.

Sang Lee, a managing partner at the Boston-based consultancy Aite, said the survey's results did not surprise him. "Those figures are about in line with what we are expecting," Lee said. "We're still a couple of years away from traditional buyside trading shops adopting more sophisticated strategies." Lee expects greater adoption of electronic trading in '07 and '08. "A lot of firms are still sitting on the fence," he said.

Carl Carrie, who heads algorithmic trading at J.P. Morgan Securities, said he wouldn't have expected the survey to reveal an expectation of a surge in electronic trading this year. "Most firms that need to trade electronically, already are," Carrie pointed out. "But it's amazing how many firms have not yet made the jump." It's from this group of firms that he expects to see "exponential growth" for electronic trading in the future.

The survey's audience represented an accurate sampling of the industry, the experts said. The single day electronic survey drew 113 responses from traditional managers (59 percent), hedge funds (34 percent) and pensions and endowments (7 percent). The survey had a participation rate of 8 percent of the 1,459 buyside professionals who received the survey. Responses that came in after 24 hours were not included in the survey. Self-trading was described in the survey as using direct market access tools, algorithms and crossing networks.

In short, only 7 percent expect to "dramatically increase" their electronic trading, while the remainder either don't expect much of a change or will reduce their electronic trading.

"What this data says to me is that the big move to electronic trading was in 2004 and 2005," according to Wayne Wagner, founder of trade-cost analysis consulting firm, Plexus Group. Wagner is now an independent consultant. He also consults to ITG, which recently acquired Plexus.