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European equity investors are setting more orders by means of computers than through flesh-and-blood traders for the first time as new market policies push more money managers to go high-tech and low expenditure.
The widespread regulatory alterations, outlined to make exchanging more secured, more transparent and better worth, have hit brokers and asset managers alike and transformed the way they communicate.
As an outcome, electronic transaction - 30 years ago the preserve of tech-savvy banks and hedge funds- has constantly spread across the industry in a style that is set to acquire more pace.
Last year, European investors placed 51 percent of their orders via computers straightly linked to the stock exchange or by using algorithms, or algos, to look for a counterparty, a study by consultants TABB revealed. In 2012, the share was 46 percent.
The foreign exchange market has already acknowledged algo exchanging, which is responsible for 68 percent of orders in 2013, EBS data displayed.
Regulators would like more bond exchanging to go electronic as well, but development there has been much gradual.
The TABB study, of 58 fund managers managing 14.6 trillion euros in assets, displayed a majority intended to funnel a larger part of their business through electronic "low touch" channels, which can trim down the cost of trade by two-thirds, from the "high touch" route where trades are carried out by a human.
Some asset managers have decided to proactively lift that electronic transaction and subsequently trim down the amount of brokers they use, keeping them only to manage a huge amount of trades or orders in areas of the market where low liquidity makes dealing harder, such as small caps.
Other funds, meanwhile, may not want to boost their usage of electronic transaction but find themselves in a no option zone as brokers shut off services to smaller customers and take aim on those who route more business through them, TABB said.
While generally preferred routes of execution vary by country, fund and manager, TABB said, the chances to depend on human interplay to get trades done was especially strong among managers in continental Europe.
Pioneer Investments, which trades 500 billion euros ($695 billion) worth of assets every year and has slash down the number of brokers it utilizes to around 100 from 300, is one regional company that has already made the move.
"Over the last two years, we have completely changed the model in our trading desk... in favor of low-touch orders," said Gianluca Mineri, Pioneer's global head of trading, a move that was reflected across the industry.
"Buyside desks are taking more responsibility on orders, something that was previously outsourced to the sell-side."
And the numbers being said are huge and still in counting.
Turnover in European Union and Swiss-listed stocks totaled 8.5 trillion euros in 2013, data from Thomson Reuters Equity Market Share Reporter revealed.
Diversity
While computers cannot provide the competence or local knowledge of a stock broker, they are utilized to a greater extent for exchanging liquid instruments such as European blue-chip stocks and by investors who do not need brokers to support fund their trades.
"We're certainly increasing the use of it," said Andrew King, head of European equities at BNP Paribas Investment Partners, who manages assets worth 10.4 billion euros ($14.2 billion) chiefly invested in European large-cap stocks.
"We're not a big market timer, we don't use any capital on the broker side so...I'd like to see all our trading done on a low-cost model because I'm not convinced we need to pay for that."
The sector's refocusing on just how much worth is relinquished through poor trade execution comes as regulators demand larger amount of transparency about the relationship between brokers and funds, and look for better returns for investors in a low-growth world.
Many funds have become so-called 'dark pools' and other alternative electronic transaction platforms to trade huge blocks of shares anonymously and thereby get a better deal, even though the policies there are also undergoing review.
One of those platforms, trading network Liquidnet, said it had enjoyed a record 2013 and the trend was continuing this year with institutional block trades up 46 percent year on year among members in Europe, the Middle East and Africa.
The venue had seen a "significant increase" in average daily liquidity in continental Europe in 2013, up 220 percent, while year to date in 2014, there has been a 43.1 percent boost in large-cap exchanging from the region.
Pioneer's Mineri said his team utilized both.
"If we are working a large position we feel that our investors are better protected with the high touch or trading dark pools (where) we can do the trade with a proper level of confidentiality."
While some funds may want, or be forced, to ramp up their technology spend and hire people with electronic trading skills in the race for 'best execution', others - particularly those trading small and mid-cap stocks - are likely to hold on to their human brokers, as they have done for decades.
"There are the very tech-savvy hedge funds guys, and then... asset managers, particularly in continental Europe, that haven't really embraced algo trading because they haven't had to," Rebecca Healey senior analyst at TABB. ($1 = 0.7192 euros)
