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September 1, 2010

High/Low Touch are Neck and Neck

By James Ramage

By the end of 2011, trading technology will finally catch up to the phone call.

 

See Chart: Consolidated Order Allocation Statistics

 

An industry consultancy predicts that for the first time, the volume of shares that buyside traders send to sales desks using algorithms will be the same.

Buyside use of low-touch algorithms to trade will rise to 35 percent of volume next year, according to TABB Group estimates in its latest study, U.S. Equity Trading 2010: Low Touch Trends. Simultaneously, it estimates buyside use of high-touch sales trading will fall in 2011 to 35 percent of its share volume.

For low touch, that would be an increase of 21 percent. Currently, low touch accounts for 29 percent of all volume traded on the buyside. Conversely, high-touch trades are expected to drop 10 percent. High touch accounts for 39 percent of all buyside trading volume today, according to the report.

"It's not surprising," said Adam Sussman, a director of research at TABB and co-author of the report. "This is illustrative of the trends that have been occurring for a number of years."

The report gave two explanations for its estimate. First, because buyside traders were pleased with their algo performance during the financial crisis of 2008-2009, they decided they could put greater reliance on electronic trading. And this happened at the expense of sales traders. Second, algos enable the buyside to handle more order flow than they could manually.

Greenwich Associates, another consultancy, arrived at a similar conclusion in a May 2010 report: As algorithm use continues to increase, sales trading continues to decline.

The TABB report also had bad news for program desks. It predicted that program desks would see 20 percent less in share volume in 2011 than they do this year.

Program desks would execute 8 percent of overall volume, according to the report. This compares to 10 percent for 2010.

The reason behind the anticipated drop? Blame the buyside's do-it-yourself mentality. As the buyside does more of its own trading, Sussman said, the amount of share volume reaching the program desks at brokerages is expected to fall.

For its methodology, TABB spoke to 66 head traders at traditional institutional investment management firms with a collective $12.1 trillion in assets under management. The consultancy also interviewed 57 head traders at hedge funds with aggregate $182.1 billion in assets under management.

 

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