Large institutions are shifting trading volume to algorithmic avenues of execution as the overall commission pool remains flat. These were the finding of a new study from marketing research firm Greenwich Associates.
Greenwich Associates estimates that the annual pool of cash equity commissions paid by institutional investors to brokers on U.S. equity trades to be $9.65 billion. This amount is down more than 30 percent from its peak in 2009.
While that may seem like a dismal figure, it is important to note that the 2016 level is about 4 percent higher than the low of $9.3 billion reported in 2013, says Richard Johnson, vice president of market structure and technology for Greenwich Associates. He is the author of the report entitled, Flat E-Trading Volumes He n U.S. Equities Mask Increase Among Larger Accounts.
The market research firm based in Stamford, CT interviewed 223 U.S. equity portfolio managers and 321 U.S. equity traders between November 2015 and February 2016 regarding U.S. equity investing.
Some market observers have suggested the commission pool is shrinking due to increased use of low-cost execution channels. While the average share of U.S. equity trading volume directed to electronic channels including dark-pool sourcing algorithms or smart-order routing (SOR) algorithms has been flat at roughly 38 percent since 2009, the study data does reveal a meaningful pick-up in e-trading among the biggest institutional traders. The largest commission-generating accounts participating in the study increased their use of algorithmic trading strategies/SOR by almost 10% between 2015 and 2016, reads a press statement.
When electronic trading started its rise two decades ago, many assumed that its growth trajectory would continue, with single-stock phone-based trading continuing to lose market share. However, in 2016 trades sent to high-touch sales traders continue to generate the bulk of the commission pool.
In a world where trading algorithms are considered commoditized, the human touch can be a differentiator, says Johnson.