Buy-Side Algo Trading volume downticks for first time in five years

Buy-side firms are under a global microscope to ensure they act in the best interests of their clients, according to TABB Group in the first of a three-part 11th annual benchmark study series, “US Institutional Equity Trading 2015: A Vision Forward,” which covers buy-side firms’ top initiatives, execution channel allocation and commissions, including wallet, rates, CSAs, broker vote and unbundling.

A whirlwind of scrutiny by regulators and media has tipped the scales in favor of long-awaited technology platform implementations to facilitate large tasks of data collection, analysis and surveillance. Where US scrutiny is focused on sell-side routing practices and trading system functionalities, in Europe transparency into buy-side research costs is receiving the most attention but it is increasingly likely that the divorce of research payments from trading commissions in Europe will seep into US buy-side firms’ operations.

Although transparency can set traders free in a world of conflicted interests, says Sayena Mostowfi, a TABB principal and head of US equity research who co-wrote the report with research analyst Valerie Bogard based on interviews with heads of trading at 92 buy-side firms, including traditional asset managers and hedge funds, more information leads to a greater need to manage it.  “Areas for improvement are the subject of debate amongst the buy side, sell side and regulators, including SEC Chair Mary Jo White in her 13 Directives. However, what’s undeniable is the fact that the tides have changed and significant operational changes are in store for the buy side.”


A summary of key findings includes:

Execution Channel Allocation: Volume allocated to DMA/algos decreased to 38% from 41% for asset managers and to 43% from 48% for hedge funds in part due to lower commission wallets.


Trading and Research Commission Unbundling: US buy-side firms on average used 68 research firms with small, medium and large firms averaging 46, 63 and 124 firms respectively, magnifying potential impact of European regulation on US buy-side operations.


2014-2015 Initiatives: Surveillance compliance demands (data collection), execution quality (real-time, pre-trade and post-trade TCA) and technological concerns are driving 27% of the firms to replace and upgrade decade-old OMS/EMSs.