Canadian money managers have long been slow adopters of electronic, algorithmic trading, preferring to deal with traders in the more old-fashioned way. But as returns slump, leading to pressure to find savings, that’s changing pretty quickly.
A survey by Greenwich associates shows that 22 per cent of Canadian equity trading dollar volume is getting done by electronic means, up sharply from 17 per cent a year ago. The expectation is that it will reach 27 per cent in three years.
Meantime, the so-called high-touch business, where a portfolio manager deals with a trader at a brokerage who handles the transaction, now accounts for 71 per cent of volume, down from 78 per cent a year ago. That’s heading lower, to 65 per cent in three years, those surveyed said. Still, that’s higher than the 50 per cent level to which high-touch has fallen in the U.S.
Commissions on such trades are much lower, at about 1.2 cents a share in 2012, compared to 3.3 cents a share for a more traditional high-touch trading service. Apply those savings to thousands of shares, and the extra cash from reduced trading costs can add a few precious basis points to a manager’s returns.
That’s not the only factor. “The increasing adoption of electronic trades certainly is due to economic reasons, but also a generational shift in attitudes, with younger traders more willing to adopt electronic practices,” Greenwich said.
It’s not all bad news for traders. Greenwich said that the overall commission pool that institutions pay traders is on the rise, having gained 11 per cent to $770-million in the 12 months up to mid-February, with expectations it will rise as much as another 5 per cent by year end.
Still, that’s far from where it was in 2009, when commissions were more than $840-million, by Greenwich estimates.
What are portfolio managers buying when they trade? Banks and oil stocks. About 42 per cent said they expect banks to be among the top sectors in Canada for performance, and about 35 per cent cited oil and gas producers. Base metals miners garnered votes from 26 per cent.