January 16, 2024 — Equity investors increased the share of trading volumes executed electronically last year, continuing the evolution of the U.S. stock trading business into an increasingly complex, fast-moving technologically driven market structure.
Electronic trading platforms captured 44% of buy-side U.S. equities order flow in 2023, up from 42% in 2022, according to new data from Coalition Greenwich. Approximately 37% of overall 2023 volume was executed through algorithms and/or smart order routers (an increase from 35%), while 7% was directly routed to crossing networks, flat year over year.
Electronic trading makes up an even bigger share of the business for the highest commission-paying institutions in the marketplace. Among these active institutions, 59% of flow by notional value is channeled through algorithms and 7% via crossing networks. While electronic trading continues to gain traction, it still plays a secondary role to high-touch sales trading—at least for now.
“Managers anticipate a continued upward trend, projecting algorithmic trading to reach 40% and crossing networks to increase to 8% within the next three years,” says Jesse Forster, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of U.S. Equity Markets 2024: Trends and Opportunities.
As buy-side firms shift to more electronic execution, they are also cutting back on the number of brokers they use to trade U.S. equities overall. Buy-side desks have modestly reduced their equity trading counterparty lists to an average of 31 brokers, down from 31.5 in 2022.
“Sourcing natural liquidity remains the buy-side’s primary determinant in allocating a diminishing commission wallet, and desks are reducing their broker lists while concentrating flow to their top providers,” says Jesse Forster. “There is one important exception: higher commission payers are expanding their lists to an average of 44.1, indicating a unique trend among top-tier institutions.”
Buy-side managers last year used 55% of their equity commission spend to pay for research and advisory services last year, signaling a marginal increase from the past two years. Hedge funds, trading more electronically at lower commission rates, led this move. Conversely, allocation to sales trading and agency execution services experienced a three-point decline.
U.S. Equity Markets 2024: Trends and Opportunities offers an exclusive backstage look at the ongoing transformation of strategies, preferences and technology adoption shaping the buy and sell side’s navigation through this complex ecosystem.