How electronic trading is remaking Streetscape
Ask Canadian institutional investors how they feel about electronic stock trading, and the country's biggest money managers will say they are reluctantly embracing the trend.
Ask Greenwich Associates what's happening in markets, and the experts say there's an ever-increasing trend to replacing high-priced human traders with low-cost computers. The Boston-based consulting firm has concluded domestic institutions are embracing electronic trading, even if they often don't realize they are making the switch.
Greenwich came out Thursday with its annual ranking of the Street's equity departments - BMO Nesbitt Burns and RBC Dominion came out on top - along with predictions of a grim future for the Street's traditional approach to buying and selling stocks.
Before diving into where trading is going, recall where we've come from. Two generations back, institutional commissions on TSX trades were fixed at something in the 15-cent-a-share range. A generation back, deregulation and competition had chopped fees to a nickel a share. These days, Greenwich found electronic trading plays out for 1.4 cents a share.
Here's where it gets really scary for equity types who haven't embraced their computers - and there are plenty of Luddites on the Street.
Electronic trading currentlyaccounts for 16 per cent of Canadian stock trading, and institutions told Greenwich that they expect the total will rise relatively modestly, to just 18 per cent over the next three years. But Greenwich's Jay Bennett said the money managers are likely underestimating their use of computers, or understating how much they will trade this way because use of the systems is becoming commonplace.
"Changes in trading practices could prove much more rapid and less linear than suggested in institutions' predictions about the future," said Mr. Bennett. "The reason: Lines are blurring between some of these non-traditional execution methods."
For example, Mr. Bennett said portfolio managers often put buy and sell orders into the market, where those orders are increasingly filled in algorithmic trades that find the best price across multiple markets. The institutional investor may not even realize their trades get done this way. Greenwich consultants said: "Institutions are only starting to develop trading techniques to best take advantage of these new technologies."
What does this mean for the dealers? More electronic trading, at lower fees, translates into a commission pie that has less than the $690-million that institutions paid to Canadian dealers last year. Mr. Bennett said contrary to expectations, "the commission pool is flat from last year, at best."
Greenwich also found that institutions plan to get more bang for each commission buck by concentrating their trading with a few key dealers: 30 per cent of the investors it surveyed plan to cut back on the number of investment banks they do business with over the coming year.
When it comes to rating the equity departments at investment banks, Greenwich declares winners on both an anecdotal basis - what customers judge as the quality of the service they get - as well as quantitatively - the number of votes each dealer actually receives. (Consultants seem to favour multiple winners.)
At left, the scorecard for this year.
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Quality control
Greenwich Quality Leaders - Equity Research & Sales
BMO Nesbitt Burns
RBC Dominion Securities
Scotia Capital
Greenwich Quality Leaders - Equity Trading
BMO Nesbitt Burns
RBC Dominion Securities
TD Securities
Greenwich Vote Leaders - Equity Research & Sales
RBC Dominion Securities
BMO Nesbitt Burns
TD Securities
Greenwich Vote Leaders - Equity Trading
RBC Dominion Securities
TD Securities
BMO Nesbitt Burns
