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John Turney
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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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September 17, 2008

Program Trades Head Overseas

Technology & New Markets Boost U.S. Program Trading Abroad

By James Ramage

Also in this article

Two years ago, it was practically unheard of to use algorithms in Latin American markets for a program trade.

Today, U.S. traders can employ them to execute baskets in Brazil or Mexico.

The adoption of electronic trading technology in countries that until recently lacked the means to support their operation is telling. It shows that the buyside has been growing more comfortable looking outside of the U.S. for alpha opportunities and is even trading programs where few have gone before.

Meanwhile, many investors are also trading more programs in overseas markets they've come to know well, such as those in Western Europe, Hong Kong and Tokyo.

In all, more portfolio volume is being executed in non-U.S. markets today. A recent Greenwich Associates survey on program trading puts international growth up a whopping 66 percent from 2007 to 2008.

By comparison, the growth of international program trading is more than twice that of the growth of equity assets in overseas investments.

International Drivers

The growth rate of U.S. mutual funds' international equity investments between 2006 and 2007-the most recent data available-is 30.5 percent, according to AMG Data Services, an Arcata, Calif.-based provider of mutual fund flows and holdings information. Year to date, non-U.S. stocks comprise about 17 percent of all equities in mutual funds, AMG reports. Mutual funds are also a good proxy for the institutional arena for trading flows and asset allocation, according to Alec Young, an international equity strategist at Standard & Poor's.

And international trading has been driving the overall growth on program desks.

For their part, the biggest brokerages have also seen large increases in overseas volume on their program trading desks. Some have reorganized those desks to handle the growth more efficiently for international orders.

But the story starts with the institutions and their investment strategies.

"What we are seeing-from the investor's standpoint-is the continued movement of assets into the international markets, specifically into emerging markets, via programs," says Bill Stush, a director at Merrill Lynch who heads the international portfolio trading desk in the U.S.

In the Greenwich study on portfolio trading, international grew to 33 percent of overall program trading volume this year, compared with 25 percent in 2007. This means U.S. program trading shrunk to roughly two-thirds of overall volume over this period. But the rising tide of program trading showed that domestic portfolio trading grew 12.3 percent, despite its smaller piece of the total program trading pie, according to the study.

That international growth is most notable in Europe, which comprised 59 percent of international volume, according to the study. Japan was next, followed by the rest of the Asia-Pacific region.

Greenwich Associates reports that this year's gains in international were largely driven by two factors: trading in Europe and the United Kingdom, and the activity of roughly a dozen hedge funds.

Program trading is up significantly overall, as well, the study reports. Worldwide volumes increased 25.7 percent this year, to $1.76 trillion, from $1.4 trillion in 2007.

Greenwich conducted the study between December 2007 and February 2008. It questioned 124 mostly U.S.-based, "large and actively trading institutions," according to the research firm.

It defines a program trade as a transaction of 15 or more stocks that represent at least $1 million of notional volume.