Tuesday, April 23, 2019 Stamford, CT USA — The arrival of MiFID II kicked off a new phase in the evolution of global equity markets, and that pace is set to accelerate as emerging technologies like “algo wheels” and artificial intelligence (AI) transform the way investors around the world execute equity trades.
In January 2018, European equity markets underwent a tectonic shift, as MiFID II regulations came into force. An unbundling of research from trading and a more stringent best execution requirement changed the way European firms look at the equity trading business—and their relationships with equity brokers.
“Relationships matter more in the U.S. and Canada than they do in Europe,” says Richard Johnson, Principal in Greenwich Associates Market Structure and Technology team, and author of the new report, Trends in Global Equity Electronic Execution. “This is a clear result of the MiFID regulations, and a sign of how North American markets may evolve going forward.”
Algo Wheels and AI-Enhanced Algorithms
Over the last year, buy-side traders continued shifting modest but meaningful amounts of trading business from traditional “high-touch” trades to algorithmic trading. In Europe, buy-side traders are now using low-touch channels for 35% of their flow, up by four percentage points since 2017. North American markets are up two percentage points to 41% in the same time frame.
Alongside MiFID II in Europe, one of the biggest drivers of this shift is continued innovation. An important recent trend is the emergence of algo wheels, or routing technology embedded into a trader’s execution management system (EMS) that selects the best underlying broker algos and automatically routes the order. Currently, less than a quarter of traders use an algo wheel, but those who do use it for 38% of their algo flow. “We believe that algo wheels are set to gain wide adoption, which will lead to an increase in the overall level of electronic trading and a more competitive landscape for electronic brokers,” says Richard Johnson.
Going forward, the integration of AI to algos could have an even bigger impact. Brokers are already rolling out machine-learning algorithms that can digest a vast quantity of historical trade data and figure out the most appropriate trading strategy based on a user’s parameters. To date, only 27% of firms have tried AI-powered algos—and early reviews are mixed.
“When it comes to AI in trading, we are still in the very early innings, so it may be a few more years before we see widespread adoption,” concludes Richard Johnson. “One thing is certain, though—the path for technological innovation only goes forward.”