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Algorithmic Trading: Hype or Reality?

Algorithmic Trading: Hype or Reality?

Aite Group expects algorithmic trading volume to account for over 40% of total U.S. equities trading volume by 2008 as algorithmic trading moves from a market driven by quantitative hedge funds and proprietary trading desks to one driven by mainstream buy

By Sang Lee, Sang Lee

Boston, MA, March 28, 2005 – According to a new report from Aite Group, LLC, despite the hype surrounding the algorithmic trading market, most of the adoption so far has been led by hedge funds and proprietary trading desks of bulge bracket firms. In order to encourage further expansion of algorithmic trading, key service providers are taking a more consultative approach to educating and assisting buy-side clients so that they can take full advantage of benefits associated with algorithmic trading.

To date, bulge bracket firms have dominated the algorithmic trading service market, leveraging their existing relationships and industry reputation within the hedge fund and traditional investment management communities. However, touting un-conflicted execution services, large agency brokers such as ITG, BNY Brokerage, and Instinet are trying to chip away at the market share of bulge bracket firms.

The report provides projected IT spending figures for key technology components that facilitate algorithmic trading and also a check-list to be used when shopping for an algorithmic trading service provider.

 

According to Sang Lee, Managing Partner of Aite Group and the author of the report, “Despite the obvious benefits associated with algorithmic trading, it would be a monumental mistake to think that algorithmic trading will replace human traders. Instead, algorithmic trading should be viewed as the next logical step in the overall evolution of electronic trading, representing one of the most important execution options available to traders today.” Lee also adds, “Certain trading positions will be eliminated as electronic trading becomes even more intelligent. However, with increasing adoption of algorithmic trading, we are witnessing the birth of a new type of trader: the Execution Consultant who is a part quant/execution expert capable of providing high-touch services to his or her clients to maximize the potential benefits that can be gained through electronic trading.”

This is a 30-page Impact Report. Clients of Aite Group's Institutional Securities service can download the report.