* Electronic share of trade passes 50 pct for first time
* Driven by regulation, focus on costs, tech advances
* Small and mid-sized firms to drive next stage of growth
* Some choosing to go algo, others being forced to
By Francesco Canepa and Simon Jessop
LONDON, March 13 European equity investors are
placing more orders via computers than through flesh-and-blood
traders for the first time as new market rules drive more money
managers to go high-tech and low cost.
The widespread regulatory changes, designed to make trading
safer, more transparent and better value, have affected brokers
and asset managers alike and revolutionised the way they
As a result, electronic trading - 30 years ago the preserve
of tech-savvy banks and hedge funds - has gradually spread
across the industry in a trend that is set to pick up speed.
Last year, European investors put 51 percent of their orders
through computers directly connected to the stock exchange or by
using algorithms, or algos, to find a counterparty, a study by
consultants TABB showed. In 2012, the share was 46 percent.
The foreign exchange market has already embraced algo
trading, which accounted for 68 percent of orders in 2013, EBS
Regulators would like more bond trading to go electronic as
well, but progress there has been much slower.
The TABB study, of 58 fund managers controlling 14.6
trillion euros in assets, showed a majority intended to funnel a
greater chunk of their business through electronic "low touch"
channels, which can cut trade costs by two-thirds, from the
"high touch" route where trades are carried out by a human.
Some asset managers have decided to proactively increase
that electronic trade and subsequently reduce the numbers of
brokers they use, keeping them only to process large orders or
trades in areas of the market where low liquidity makes trading
more difficult, such as small caps.
Other funds, meanwhile, may not want to increase their usage
of electronic trading but find themselves forced to as brokers
shut off services to smaller clients and focus on those who
route more business through them, TABB said.
While traditionally preferred routes of execution vary by
country, fund and manager, TABB said, the tendency to rely on
human interaction to get trades done was especially strong among
managers in continental Europe.
Pioneer Investments, which trades 500 billion euros ($695
billion) worth of assets every year and has cut the number of
brokers it uses to around 100 from 300, is one regional firm
that has already made the move.
"Over the last two years, we have completely changed the
model in our trading desk... in favour of low-touch orders,"
said Gianluca Mineri, Pioneer's global head of trading, a move
that was reflected across the industry.
"Buyside desks are taking more responsibility on orders,
something that was previously outsourced to the sell-side."
And the numbers involved are large and growing.
Turnover in European Union and Swiss-listed stocks totalled
8.5 trillion euros in 2013, data from Thomson Reuters Equity
Market Share Reporter showed.
While computers cannot offer the expertise or local
knowledge of a stock broker, they are increasingly used for
trading liquid instruments such as European blue-chip stocks and
by investors who do not need brokers to help fund their trades.
"We're certainly increasing the use of it," said Andrew
King, head of European equities at BNP Paribas Investment
Partners, who manages assets worth 10.4 billion euros ($14.2
billion) chiefly invested in European large-cap stocks.
"We're not a big market timer, we don't use any capital on
the broker side so...I'd like to see all our trading done on a
low-cost model because I'm not convinced we need to pay for
The industry's refocusing on just how much value is lost
through poor trade execution comes as regulators demand greater
transparency about the relationship between brokers and funds,
and seek better returns for investors in a low-growth world.
Many funds have turned to so-called 'dark pools' and other
alternative electronic trading platforms to trade large blocks
of shares anonymously and thereby get a better deal, even though
the rules there are also undergoing review.
One of those platforms, trading network Liquidnet, said it
had enjoyed a record 2013 and the trend was continuing this year
with institutional block trades up 46 percent year on year among
members in Europe, the Middle East and Africa.
The venue had seen a "significant increase" in average daily
liquidity in continental Europe in 2013, up 220 percent, while
year to date in 2014, there has been a 43.1 percent increase in
large-cap trading from the region.
Pioneer's Mineri said his team used both.
"If we are working a large position we feel that our
investors are better protected with the high touch or trading
dark pools (where) we can do the trade with a proper level of
While some funds may want, or be forced, to ramp up their
technology spend and hire people with electronic trading skills
in the race for 'best execution', others - particularly those
trading small and mid-cap stocks - are likely to hold on to
their human brokers, as they have done for decades.
"There are the very tech-savvy hedge funds guys, and then...
asset managers, particularly in continental Europe, that haven't
really embraced algo trading because they haven't had to,"
Rebecca Healey senior analyst at TABB.