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Penetration of algorithms among buy- and sell-side firms in Europe and Asia is less than 10 percent, according to both Peter Kearns, president of NeoNet Securities (a New York-based agency broker offering clients international direct-market-access trading), and Aite Group cofounder and managing partner Sang Lee, both of whom spoke at a NeoNet roundtable on algorithmic trading in early May in New York. But both agree that the interest in algorithmic tools is indeed growing.
Lee pointed to Korea and Japan specifically, where, he said, brokerage firms such as Nomura Securities and Nikko Securities are pondering giving algorithms to their traders as a tool. And international brokerage firms are sharpening their focus on these offerings to ensure that they don't get beat to market by U.S.-based competitiors, which are looking to expand to new markets and provide algorithms to global fund managers.
However, the big driver behind overseas algorithmic growth isn't the need for local brokers to come up with their own solutions to save money. The primary catalyst has, and will continue to be, demand from the larger asset managers, just as is the case in the United States.
According to Lee, overseas asset managers and other large investors are watching the adoption of these programs in the U.S. closely. And they appreciate the need to automate at least some part of the trading process, which will help them source liquidity and buy into positions without moving the market, he noted.
The logic is that as more people, particularly in Europe and Asia, give brokers and asset managers funds to invest, fragmentation in the markets is likely to increase. As has been the case in the States, as more money flows into these markets, additional local exchanges and/or ECNs likely will emerge, and this, in turn, will drive demand for more-efficient order routing.
Breaking Tradition
Still, Lee said he believes that continued market penetration of algorithms in Asia and Europe will be slow in comparison to adoption in the U.S. Among the factors creating barriers to adoption is the fact that regulators and operators of exchanges abroad tend to be slow to adapt to new technologies and prefer more-traditional human contact. In addition, market participants traditionally have had their order flow directed by humans, and, as such, are slow to break the habit.
But again, these same players recognize the advantages that program trading offers, according to NeoNet's Kearns. He pointed to Germany and England as two obvious candidates for future algorithmic expansion, particularly the London Stock Exchange, which Kearns noted is "highly liquid and represents a significant portion of the European trading."
The use of algorithms as a means of trading other asset classes, including derivatives and foreign exchange, also is catching on, Kearns continued. While he conceded that, "The trading of these vehicles is structured differently than in the United States, meaning the spreads are too wide or the liquidity too small to justify a big short-term push for an algorithmic solution," he acknowledged that firms are cognizant of the costs associated with trading derivatives. Combined with increased market fragmentation and liquidity, this means that a larger percentage of overall trades will be processed by algorithms going forward, he asserted. Firms, Kearns said, are analyzing their options and the costs - both in terms of technology/systems and education for their employees - that go part and parcel with algorithms, and the growing sentiment is that further penetration is inevitable.
