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Computers dethrone humans in European stock trading

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Computers dethrone humans in European stock trading

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European equity investors are placing more orders via computers than through flesh-and-blood traders for the first time as new market rules drive more money managers to go high-tech and low cost.

The widespread regulatory changes, designed to make trading safer, more transparent and better value, have affected brokers and asset managers alike and revolutionized the way they interact.

As a result, electronic trading - 30 years ago the preserve of tech-savvy banks and hedge funds - has gradually spread across the industry in a trend that is set to pick up speed.

Last year, European investors put 51 percent of their orders through computers directly connected to the stock exchange or by using algorithms, or algos, to find a counterparty, a study by consultants TABB showed. In 2012, the share was 46 percent.

The foreign exchange market has already embraced algo trading, which accounted for 68 percent of orders in 2013, EBS data showed.

Regulators would like more bond trading to go electronic as well, but progress there has been much slower.

The TABB study, of 58 fund managers controlling 14.6 trillion euros in assets, showed a majority intended to funnel a greater chunk of their business through electronic "low touch" channels, which can cut trade costs by two-thirds, from the "high touch" route where trades are carried out by a human.

Some asset managers have decided to proactively increase that electronic trade and subsequently reduce the numbers of brokers they use, keeping them only to process large orders or trades in areas of the market where low liquidity makes trading more difficult, such as small caps.

Other funds, meanwhile, may not want to increase their usage of electronic trading but find themselves forced to as brokers shut off services to smaller clients and focus on those who route more business through them, TABB said.

While traditionally preferred routes of execution vary by country, fund and manager, TABB said, the tendency to rely on human interaction 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 cut the number of brokers it uses to around 100 from 300, is one regional firm 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 involved are large and growing.

Turnover in European Union and Swiss-listed stocks totaled 8.5 trillion euros in 2013, data from Thomson Reuters Equity Market Share Reporter showed.


While computers cannot offer the expertise or local knowledge of a stock broker, they are increasingly used for trading liquid instruments such as European blue-chip stocks and by investors who do not need brokers to help 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 industry's refocusing on just how much value is lost through poor trade execution comes as regulators demand greater transparency about the relationship between brokers and funds, and seek better returns for investors in a low-growth world.

Many funds have turned to so-called 'dark pools' and other alternative electronic trading platforms to trade large blocks of shares anonymously and thereby get a better deal, even though the rules 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 increase in large-cap trading from the region.

Pioneer's Mineri said his team used 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)

Computers dethrone humans in European stock trading | Reuters

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