* Trading algorithms no longer seen as differentiating
* Race for speed has "run its course", consultant says
* Pressure on industry players to find competitive edge
* Rival trading venues encroach on bank, broker turf
By Lionel Laurent
LONDON, June 12 The financial industry's
multi-billion-dollar technological race for stock-market
supremacy is petering out.
After years of boosting profits with super-fast and
super-efficient trading algorithms, deemed better and cheaper
than human alternatives, banks and brokers are now facing
persistent cost pressures, sceptical clients and more regulation
that have effectively put a cap on the rewards from more
spending on technology.
The industry is gradually evolving from a race against the
clock - with banks trying to keep up with the demands of
high-speed automated, or algorithmic, stock trading - into a
less frenzied market where trading systems are increasingly
generic and where competitive edge is sought in
"The algorithms today are all very similar and increasingly
homogenised," said David Miller, Head of EMEA Trading at Invesco
Perpetual. "There are some differences in the specific
strategies ...(But) the technologies are very similar."
It's a trend that some investors say is encouraging.
"The latency (transaction-speed) race is done," said Edmund
Shing, a portfolio manager at BCS Asset Management in London.
"What matters more is liquidity and access to risk capital.
And for the big asset managers that may mean one day cutting out
the middle man entirely."
Trade-execution technology, on which the financial sector
spends $2.8 billion per year, has become highly efficient: the
time needed to process a trade has fallen by 90 percent over the
past decade, according to consultancy GreySpark Partners.
But shaving yet more fractions of a second off trades costs
a lot of money and means diminishing returns in a trading
environment where - despite soaring stock prices - commission
fees have been flattened, volumes have yet to significantly pick
up and volatility is at its lowest in seven years.
Even high-frequency traders who fuelled the race by
demanding ever-faster routes for their own algorithms are
finding it harder to squeeze out gains: high-speed-trading
revenue in U.S. equities is down from $7.2 billion in 2009 to an
estimated $1.3 billion in 2014, according to research firm TABB
"The differentiation between the algorithms is starting to
fade," said Frederic Ponzo, managing partner at GreySpark, who
said European equities markets would soon be as commoditised as
the U.S. market.
"(Cutting microseconds) costs an arm and a leg compared with
what you are able to charge your clients. The arms race has run
This does not mean that banks are packing up their computers
and hiring back seasoned traders.
On the contrary, some bankers say that the shift in client
concerns away from speed and towards better access to deeper
pools of investors - which can be a challenge now that buyers
and sellers are spread across various opaque "dark pools" as
well as regular exchanges - still requires bespoke technology.
"The variance among algos has definitely gone down," said a
bank executive who asked not to be named. "But we still invest
and find ways to improve performance across the board. And
sometimes that improvement is significant."
But even those who praise the quality of banks' trading
algorithms as cheaper and better than the manual trading that
was once the norm say pressure is now rising on the industry to
outsource more technology and find other ways to compete.
For Devesh Vishwakarma, head of hedge fund Premaeus
Investments, choosing a brokerage is as much about geographic
breadth and diversity of products as it is about trading speed.
This may not be too hard for the dominant actors, who can
soak up market share as more marginal players drop out of the
equities business, as demonstrated by Royal Bank of Scotland
and Credit Agricole's respective cutbacks.
But finding a niche is not always easy. Investors are awash
with research, analysis and trading ideas.
"A few years ago it was a great thing for us to say to our
clients that we were using algos, they were a great selling
point," said Mark Ward, head of execution trading at brokerage
Sanlam Securities, who works with bigger banks to route trades.
"Now, everyone is selling algos ... It's affecting brokers
as well as the banks. It just makes life a little more
In the end, the question remains as to how long banks can
defend a sector that is increasingly encroached upon by others.
Rival trading venues like Liquidnet now offer asset managers
the chance to trade with each other without going through an
intermediary. This is not without risks: a U.S. regulator on
Friday fined Liquidnet $2 million to settle charges that it
improperly used subscribers' information to market its services,
though Liquidnet says it has taken steps to tighten procedures.
Bankers dismiss the idea that fund managers will control the
future of trading. But with banks facing more regulation and
under pressure as a result of their own high technology
spending, there is more scope for competition from outside.
"(Tech) has come back to bite the banks," said a trader.
(Reporting by Lionel Laurent; Additional reporting by Clare
Hutchison; Editing by Giles Elgood)