Update on E-Trading and Volatility

Last Year Broke the Rising Trend in Volume of Electronic Trading

Apr 12, 2009

Although the past five years have seen dramatic increases the volume of electronic trading, this past year saw a reversal in the trend due to market volatility

past year has seen a reversal in the volume of e-trading due in no small part to the level of market volatility. While the impetus for the expansion of electronic trading over the prior five years has been the steady increase in algorithmic driven trading strategies, e-trading has declined in direct proportion to the increase in volatility. The question now is what to expect going forward.

Even a Computer Can Get Whip-Sawed

Even computerized, algorithmic trading models can get whipped-sawed if the programs were written in a less volatile market environment and were not designed to cope with this increase in volatility.

The result is, one of the upshots of our current market dynamics is that "high-touch" or sales-trader driven or assisted trading has even declined slightly while electronic, non-algorithmic trading has seen an increase of roughly 10% according to research by the consulting firm of Greenwich Associates. The jury is still out on trying to make up for losses by saving a few cents on commissions.

According to the same research by Greenwich Associates, hedge funds in particular have been conspicuous with this phenomena, having reduced their algorithmic trading from 18% to 13% while increasing their trading activity from 4% to 9% via dark pools (of liquidity) thus retaining the anonymity they covet.

Exception to the Rule

While the market in general in hedge funds in particular have reduced their algorithmic directed e-trading, pension funds, endowment funds and banks have increased their electronic trading by algorithmic strategies.

Dark Pools and Crossing Networks are Rising

Crossing networks and dark pools of liquidity, both independent and broker sponsored, are becoming ever more popular with institutional investors. The ability to move large trades and stay anonymous is considered to be a real plus by them. That assumes that anyone else cares what they are doing however.

Whether anonymity is really necessary or it is just ego-driven, the fact is that dark pools are becoming so popular that regulatory intervention may become a necessity as well.

What Does This Mean to You

For the average retail investor this is all interesting, but what can be taken away from it for their benefit?

The following is a list of attributes of electronic trading that are important to major players in descending order; take from it what may work for you:

E-trading, whether by algorithm or direct market access, is here to stay and is becoming more popular every day. To the extent that dark pools and crossing networks are unregulated and are lending a helping hand is an unknown at this point.

The copyright of the article Update on E-Trading and Volatility in E-Commerce Services is owned by Dean Lundell. Permission to republish Update on E-Trading and Volatility in print or online must be granted by the author in writing.