Electronic stock trading in Canada is expected to increase dramatically in the next year as money managers complete the integration of automated order management and messaging systems, according to a new report.
“Eighty-seven percent of investment managers we interviewed are connected to an electronic trading system, but not many are actively using it,” said Jackie Chung, author of the report. “However, based on the discussions we had, they plan to buy and sell more stock over electronic systems next year.” Ms. Chung found three reasons money managers are connected to electronic systems but not using them: internal technology constraints; soft dollar commitments; and lack of liquidity.
On the technology issue, she explained that most money managers have been putting in automated order management systems in the past 12 to 18 months, but their focus has been on connecting the trading desk and portfolio managers.
“In Canada, we have the S&P TSX 60 index, and of those 60 stocks, only about 30 are liquid, according to traders,” Ms. Chung said. “And because of insufficient liquidity in the public marketplace, it’s difficult to use electronic trading.”
Because of tight liquidity, traders are reluctant to put trades into the open market via electronic means for fear they will not be filled. But their reluctance creates a vicious cycle. “Traders create the problem, but they are the solution as well,” Ms. Chung said. “If they make use of all available liquidity, including public electronic systems, more will participate, and when more participate, it’s much easier to find natural liquidity.”
“People on the (trading) desks are becoming more receptive to technology and are understanding it’s a tool for them,” she said. “Ninety percent of interviewees expect to use more automation and technology going forward.”
Along with increased trading technology, more Canadian money managers are looking to adopt transaction cost analysis to help squeeze more value out of the trading desk. “Clients are demanding performance and everybody, including traders, (is) under pressure to deliver more portfolio performance,” Ms. Chung said.
“The writing is on the wall,” she said. Traders “need to deliver performance.”
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