Thursday, June 12 08:55:28
The financial industry's multi-billion-dollar technological race for stock-market supremacy is petering out.
After years of boosting profits with super-fast and super-efficient trading algorithms, deemed better and cheaper than human alternatives, banks and brokers are now facing persistent cost pressures, sceptical clients and more regulation that have effectively put a cap on the rewards from more spending on technology.
The industry is gradually evolving from a race against the clock - with banks trying to keep up with the demands of high-speed automated, or algorithmic, stock trading - into a less frenzied market where trading systems are increasingly generic and where competitive edge is sought in non-technological areas.
"The algorithms today are all very similar and increasingly homogenised," said David Miller, Head of EMEA Trading at Invesco Perpetual. "There are some differences in the specific strategies ...(But) the technologies are very similar."
It's a trend that some investors say is encouraging.
"The latency (transaction-speed) race is done," said Edmund Shing, a portfolio manager at BCS Asset Management in London.
"What matters more is liquidity and access to risk capital. And for the big asset managers that may mean one day cutting out the middle man entirely."
Trade-execution technology, on which the financial sector spends $2.8 billion per year, has become highly efficient: the time needed to process a trade has fallen by 90 percent over the past decade, according to consultancy GreySpark Partners.
But shaving yet more fractions of a second off trades costs a lot of money and means diminishing returns in a trading environment where - despite soaring stock prices - commission fees have been flattened, volumes have yet to significantly pick up and volatility is at its lowest in seven years.
Even high-frequency traders who fuelled the race by demanding ever-faster routes for their own algorithms are finding it harder to squeeze out gains: high-speed-trading revenue in U.S. equities is down from $7.2 billion in 2009 to an estimated $1.3 billion in 2014, according to research firm TABB Group.
Some bankers say that the shift in client concerns away from speed and towards better access to deeper pools of investors - which can be a challenge now that buyers and sellers are spread across various opaque "dark pools" as well as regular exchanges - still requires bespoke technology.
But even those who praise the quality of banks' trading algorithms as cheaper and better than the manual trading that was once the norm say pressure is now rising on the industry to outsource more technology and find other ways to compete. (Reuters)