US Equities Shifting to Low-Cost Execution, Study Shows

Large sized institutions are shifting trading volume to algo channels of execution.

The migration to algorithmic (algo) channels of execution have been gradually increasing across US equity venues, encompassing both the retail and institutional space. The latest data and consequent study published by Greenwich Associates has shown an uptick in low-cost execution channels, highlighted by a vastly diminished commission figure on trades, per a Greenwich Associates report.

US institutional venues have on the whole been experiencing a lackluster year thus far – in particular, H1 2016 was a one-sided narrative, with figures pointed lower for multiple months. Thanks in large part to Brexit-induced volatility, markets finally came to life with exchanges showing rebounding figures for the first time since early 2016 – equities was one such asset class that followed this trend, in many cases seeing yearly highs such as the case of Nasdaq.

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In addition to a resurgence of US volumes, equities trades have undergone several notable trends over the past year. According to the recent study published by Greenwich Associates, large sized institutions are shifting trading volume to algorithmic avenues of execution as the overall commission pool remains stagnant. The study featured a panel interviews conducted with 223 US equity portfolio managers and 321 US equity traders between November 2015 and February 2016.

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Amongst the notable findings were figures of the annual pool of cash equity commissions paid by institutional investors to brokers on US equity trades, which came in at $9.65 billion over the aforementioned interval – this was down more than -30% from a peak in 2009.

Richard Johnson, Greenwich Associates
Richard Johnson, Greenwich Associates

According to Richard Johnson, Vice President in the Greenwich Associates Market Structure and Technology group, in a recent statement on the report findings: “While that may seem like a dismal figure, it is important to note that the 2016 level is about 4% higher than the low of $9.3 billion reported in 2013.”

Moreover, the commission pool amongst respondents has also been shrinking consistently, which is due in large part to an uptick in the use of low-cost execution channels. As such, e-trading has been picking up, despite the average share of US equity trading volume directed to electronic channels remaining flat at roughly 38% since 2009. According to the study, the largest commission-generating accounts participating in the study increased their use of algorithmic trading strategies by almost 10% between 2015 and 2016.

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