Buy Side Focuses on Order Routing

Asset managers are increasingly includingorder routing in their best execution due diligence asequityvolumes shift toalgorithmic trading.

Consultancy Greenwich Associates said in a report yesterdaythat large institutions are shifting trading volume to algorithmic avenues of execution which has kept the overall commission pool flat.The annual pool of cash equity commissions paid by institutional investors to brokers on US equity trades was $9.65bn (8.7bn), down more than 30% from its peak in 2009 but 4% more than the low of $9.3bn reported in 2013.

The largest commission-generating accounts participating in the study increased their use ofalgorithmic tradingstrategies/smart-order routing algorithms by almost 10% between 2015 and 2016.Greenwich Associates interviewed 223 US equity portfolio managers and 321 US equity traders between November 2015 and February 2016 for the report Flat E-Trading Volumes in U.S. Equities Mask Increase Among Larger Accounts.

Greenwich added that although notional dollar volumes traded via algorithms have not been more than a third of total volume since 2012, recent bouts ofvolatilityand the approval of IEXs exchange application are likely to force a refocus on the use of algo-driven routing logic to help navigate an increasingly complexmarket structure.

The US Securities and Exchange Commission controversially approved IEX Group as a stock exchange last month. The venue, featured in bestseller Flash Boys incorporates a speed bump – a 350 microseconds delay between matching an order and publicly displaying the match – in order to make it more difficult forhigh-frequency tradingstrategies to interact with its order flow.

Pragma Securities, a provider ofalgorithmic tradingtools, also said in a report yesterday that thebuysideis paying increasing attention to order routing practices.

This increasing diligence is appropriate, said Pragma. Ultimately most high-touch order flow also ends up being traded algorithmically, and algo routing logic can compromise execution quality for high-touch trades in the same ways as self-directed trading.