European equity trading continues a dramatic metamorphosis, according to a report released by the Tabb Group.
Ninety-six percent of participants in the study of hedge fund managers and traders anticipate a continuation or increase in their use of algorithms this year, compared to only 16% in 2005. Leading the path towards algorithmic trading are firms that pay less than $45 million in annual commissions, a report noted.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Algorithms: “Low touch” brokerage to capture 40% of market
Not only will algorithmic trading increase, but the study also says “low touch” brokerage channels, without heavy emphasis on human service, will become more in vogue as the business has become less profitable. The study expected “low touch” services to capture 40% of the market.
Three perennial heavyweights – UBS, Morgan Stanley and Credit Suisse – now contend with a challenger
In the battle for algorithmic execution, the game continues to be played by well-known players such as UBS AG (NYSE:UBS), Morgan Stanley (NYSE:MS) and Credit Suisse Group AG (ADR) (NYSE:CS) all battling for the top three spots respectively, but Investment Technology Group (NYSE:ITG) is moving strong in fourth position as the top algorithmic execution provider, according to the study. The report noted the potential for “a new era of electronic trading to emerge,” one that might bring about changes in technical leadership.
One of the wider challenges brokerages face is payment for non-execution services, and here the report notes that “Europe will undergo a revolution in the type, quantity and manner of services consumed by users of low-touch automation. ” The report said in the past the low touch approach was associated with passive investing, but the “appetite for alpha is back. While passive funds have thrived in the low-touch algorithmic world, trading small and mid-cap names is both expensive and time consuming,” the report said, touching on a hot industry topic. “As standardized algorithms still deliver sub-optimal performance, this will force innovation in the mix of products and services as the buy side has to become less dependent on 20-year-old relationships and embrace greater automation and autonomy.”
Low-Touch Domination Takes Off
The study, titled “European Equity Trading 2014, Part 2: Low-Touch Domination Takes Off,” was conducted by interviewing 58 head traders of equity management firms across Europe, the UK and the US that comprised firms with 49 long-only asset management firms and nine hedge funds, managing €14.6 trillion in assets under management (AUM).
The initial study, released Feb 4, highlighted how brokerage commissions were slipping and limited resources were forcing them to limit services to only their most profitable clients. This study noted that as brokerage firms become more selective, liquidity pooling was being impacted. The rise of dark pools, discussed on ValueWalk numerous times, is an example of a model that doesn’t utilize high touch brokerage relationships to execute trades.