New Greenwich Report Shows Electronic Trading Volumes Flat Since 2012
After years of robust growth, e-trading volumes in U.S. equities have flatlined since 2012. Putting the brakes on the e-trading expansion has been a combination of increased market complexity, high levels of business concentration and competing demands for order flow.
The results of the Greenwich Associates 2015 U.S. Equity Investor Study show that institutions over the last year executed about one-third of overall U.S. equity trading volume electronically—a share essentially unchanged from the prior two years.
These results, which are based on interviews with 243 U.S. equity portfolio managers and 321 U.S. equity traders, prove that although e-trading is nearly ubiquitous among institutional investors, usage has plateaued. While 90% execute at least some of their trades electronically, over the last four years institutional investors consistently executed only one-third of their U.S. equity volumes through broker e-trading offerings. In a paper released today entitled, U.S. Equities: The E-Trading Stalemate, Greenwich Associates offers three primary reasons for this stagnation:
1. Competing demands for order flow. E-trading volumes are constrained by institutions’ need to parse out trades and commission payments to brokers as compensation for research and for capital commitment.
2. Market complexity. Due to regulations and a host of other factors, market structure is becoming increasingly complex. With waves of e-trading product offerings from smaller brokers and an influx of new, indistinct matching engines, electronic trading seems to be adding to this complexity rather than solving it.
3. High Levels of Concentration. While market structure and the menu of available electronic offerings become increasingly complex, institutions are clear in what they want from their execution platforms: simplicity, reliability and responsive support.
“Today, equity desks interact with around 40 brokers annually,” says Craig Viani, Greenwich Associates Vice President of Market Structure and Technology. “Of those relationships, roughly 70% of e-trading is executed with the top 2 brokers.”
Growth To Resume, Eventually
Greenwich Associates believes e-trading volumes will eventually return to growth. Technology improvements on both the buy side and the sell side, as well as the proliferation of transaction cost analysis (TCA) and increased availability of intra-trade performance measurement by venue, should help e-trading volumes break out from their current plateau in the next 18–24 months.