Exclusive Online Only ContentAlgos Gain Ground, But Research is Again King, Tabb Says
February 3, 2010
Algorithms have displaced sales traders as the dominant means of executing trades, the research firm Tabb Group said Wednesday.
But, at the same time, high-quality research that produces outsize returns is now more important than innovation in electronic means of gathering liquidity or executing trades, principal Laurie Berke said, as part of her delivery of its report on "U.S. Institutional Equity Brokerage 2010."
Sales traders as recently as four years ago took care of executing 69 percent of trades, Tabb said in its survey of 66 head traders at traditional asset management firms. Now, Tabb projects that the percentage of trades that will be executed by mathematical formulas on computers will reach 36 percent of all trades for the asset managers this year. That will compare to just 33 percent executed through sales traders in 2010 -- a drop of 36 percent.
Berke also pointed out that algo trading consistently has exceeded expectations. A year ago, Tabb projected that algorithms would be used for 28 percent of the asset managers trades in 2009. The actual result: 31 percent.
Sales traders actually gained share in 2008, in the midst of the credit crisis. But that turned out to "be a blip, not a trend,'' Berke said, against a general decline in the share of trading they have been asked by asset managers to handle.
Sales traders are also losing ground, Tabb's survey indicated, in tracks of large blocks of stock. Where sales traders accounted for 55 percent of block trades in 2008, their share declined to 41 percent in 2009 and is projected to slide to 36 percent in 2010. Electronic venues took 45 percent in 2008 and will reach 64 percent this year.
But a big gainer last year, as investors fled equities markets and funds that invested in them, was research. The asset managers said that the top business driver for their efforts to achieve above-market returns for their clients was "alpha-generating content,'' according to Tabb. That was cited by 69 percent of the head traders as the top driver, compared to 11 percent the year earlier.
The previous year the kind of liquidity that could be pulled together by electronic venues and the ability to execute trades electronically, in both public and dark pools of capital, was the top driver.
Is electronic execution out and research in, again?
"The easiest answer is yes, for now,'' said Berke. "The easiest answer is that the U.S. investor's experience with U.S. equity investing has made an indelible impression and it will take time to bring that investor back."
With mutual funds and 401(K) plans rocked by and in many cases depleted by the near collapse of financial markets a year ago, the job of asset managers now is "demonstrating superior performance and rebuilding trust and rebuilding confidence in the ability of active managers to outperform the index benchmarks," Berke said.
The electronic trading "revolution is somewhat over,'' she said. "For now, it's bringing the customer back'' that matters.
