Electronic Trading by Institutional Investors Increasingly Common

The use of brokers by institutional investors to execute single stock trades is gradually becoming defunct, giving way to more cost efficient electronic and portfolio trading systems, according to recent research by Greenwich Associates.

According to the Connecticut-based firm, a survey of institutional investors predicted that by the year 2010, 55% of equity trading volume will be executed through electronic and portfolio trading systems.

Among other effects of this transformation, this means that commissions paid to brokers by institutions have fallen off by 4% in the 12-month period studied by Greenwich Associates. According to the study, commissions held steady at about $10.8 billion in 2005 and 2006, but slipped to approximately $10.3 billion in 2006-2007.

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The authors of the study argue that commissions declined because more trading volume was executed through portfolio and electronic trading systems. The volume of trades conducted in this way spiked to 37% between 2006 and 2007, a decline from less than a third the prior year.

Electronic trading has also driven down trading costs. “All-in” blended commission rates for institutional trades across single-stock, program and direct-to-market electronic trades have fallen to an average of just 3.16 cents per share, according to the study. Included in that average is the 3.8 cents per share weighted average commission rate on NYSE agency trades — down from 3.9 cents in 2006 and 4.0 cents in 2005 — as well as the 1.8 cent per share average rate on electronic trades and 1.7 cent average for portfolio trades.

Algorithmic trading is propelling this increase in electronic trading in U.S. equities, showing a growth of 15% of U.S. equity trading volume in 2006-2007 from 10% the prior year. Institutions predict this trend will continue and account for 23% of total U.S. share trading volume on a market-wide basis over the next three years, according to the research.

For more information, visit www.greenwich.com.