The surge in trading activity triggered by the crisis last year fueled an increase in buy-side spending that reversed a decade-long decline on payments for trade execution and research.
U.S. institutions paid brokers and other providers $7.36 billion for trade execution and research in the year ending Q1 2021 - up from the recent low of just $6.6 billion in the preceding year.
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“That increase is good news for the sell side, which has experienced steady erosion of the pool of payments and commissions,” says Shane Swanson, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of U.S. Equity Market: 2021 Spend and Trends. “However, it’s unlikely that these gains will persist as markets normalize.”
Even as the trend in overall spending reversed itself, another long-term trend remained intact last year. Institutional investors continued to reduce the share of their equity trading volume executed through high-touch trades. High-touch trading declined to just 44% of overall trading volume in the year ending Q1 2021 - down from 56% as recently as 2012. Meanwhile, algorithmic/direct market access (DMA)/smart-order routing (SOR) climbed to 35% of overall volume last year - up from just 29% in 2012.
These trends correspond to broader improvements in trading technology over the past decade. As the underlying technology has become more sophisticated and automated, more firms are able to transfer higher and higher amounts of risk to low-touch strategies. Hedge funds, which have been the most active users of algo/SOR trades, expect this type of execution to account for nearly half of their overall equity trading volume within three years.
Dark Liquidity Growing in Importance
As they assess trade outcomes and allocate trading volume, institutional investors are paying increasing attention to dark liquidity. Amid a surge in activity, innovation and investment in the dark pool space, growing numbers of institutions are prioritizing dark liquidity in their selection of algo providers. In 2021, access to dark liquidity was the second most important criterion for algo selection, just under ease of use, the No.1 factor for both 2020 and 2021.
Source: Coalition Greenwich