Skip to main content

Trader works on the floor of the New York Stock Exchange, July 14, 2016.Richard Drew/The Associated Press

Despite predictions that machines were eventually going to take over equity trading, humans are holding their ground.

According to a report released this week by research firm Greenwich Associates, people still do the bulk of stock trading and receive most of the commission pool in the United States. It's a similar story in Canada.

"When electronic trading started its rise two decades ago, many assumed that its growth trajectory would continue, with single-stock, phone-based trading continuing to lose market share," wrote author Richard Johnson, a vice-president with Greenwich in its market structure and technology group.

But it hasn't exactly turned out that way.

So-called high-touch trading – single-stock transactions sent to a human trader at a sell-side brokerage – still accounts for 54 per cent of trades in the United States, according to Greenwich. Greenwich gathered its information by interviewing hundreds of portfolio managers and traders between November, 2015, and February, 2016. In addition, high-touch trading volumes have remained around that same level for the past five years.

Electronic (or "low-touch") trading accounted for 30 per cent of trades, according to the data, a level that hasn't moved much since 2012. Cross trades and block trades made by portfolio managers made up the balance.

So what accounts for the resilience of the human trader?

Lack of innovation, for one, in the low-touch market over the past few years.

"In a world where trading algorithms are considered commoditized, the human touch can be a differentiator," Mr. Johnson wrote.

Machines, too, have limitations. You can't talk out a trade with a machine. Sometimes people need to pick up the phone and interact with another human, especially in this era of heightened volatility and uncertainty (Brexit anyone?).

"The machine is so narrow-sighted," Kevin Kozlowski, senior analyst with Greenwich, said in an interview. "It can only focus on what it is told to focus on, whereas the human – especially someone with experience – can think on their feet and understand if X happens, I need to do Y. Or if Y happens, then we need to adjust X to account for Z."

Human traders are also better informed than in the old days, Mr. Kozlowski said. Partly because of the rise of the machines, they've had to step up their game. Traders no longer have the luxury of specializing in one niche area. It's not enough just to know about energy stocks in a vacuum. You need to be clued in on market structure, regulatory changes, where liquidity is and on seemingly unrelated matters such as how the bond market and foreign exchange factor into the trade.

In Canada, we rely even more on humans for trading. Approximately 70 per cent of equity trading volume between the first quarter of 2015 and 2016 was high-touch, according to Greenwich's data.

Electronic trading took longer to catch on in Canada, and hasn't gained as much of a foothold as it has in the United States. Among insitutional investors, algorithmic and smart-order-routing trading declined to 18 per cent in the first quarter of this year, versus 20 per cent in the first quarter of 2015.

Canada's higher weighting in more thinly traded mid- and small-cap stocks, versus the United States, is part of the reason for the need to turn to a human. In the United States, tighter spreads and huge liquidity allow asset managers to cheaply buy and sell stocks electronically, and in some cases amass significant positions in companies quickly, without fear of moving the market.

"Not many stocks trade in a way that lend themselves to electronic trading in Canada, because of the liquidity profile relative to the U.S.," said Diana Avigdor, portfolio manager and head of trading at Barometer Capital Management in Toronto in an interview.

A far more common trade for a portfolio manager in Canada, Ms. Avigdor says, would be to try to buy 400,000 shares of a $30 stock that only trades 100,000 shares a day. Good luck trying to do that electronically.

"You would butcher the price," she quips.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe