New York, NY, USA
May 11, 2005
Algorithmic Trading Update 2005: Advanced Execution
Goes Mainstream
Report Published by Celent
Celent predicts that algorithmic-based equity
trading will increase from approximately 14 percent of overall trade
volumes to almost 25 percent by 2008, representing a compound growth rate
of 13 percent. Traditional buy-side firms, who have thus far been slow to
embrace algorithmic trading, represent the industry's largest growth
segment, with a five year compound growth rate of 30 percent.
 In a new report, Algorithmic
Trading Update 2005: Advanced Execution Goes Mainstream, Celent
examines the growth of algorithmic trading from the perspective of
buy-side and sell-side participants, as well as technology vendors who are
actively developing new automated trading tools for the market. Also
provided are cases studies covering two of the more actively used
algorithms in the market today, providing insight into how algorithms are
used according to underlying security and prevailing market conditions.
The report also focuses on the impact that Regulation NMS will have on
algorithmic trading strategies and front-end technology providers.
Algorithmic trading should not be viewed as
technology that will render the human trader obsolete. "Algorithms'
importance relative to traditional methods of execution and research
should not be overstated," states Harrell
Smith, manager of the securities & investments practice
and author of the report. "Algorithms are simply advanced trading
tools that will serve to make both buy-side and sell-side trading
operations that much more efficient."
Growth in algorithmic trading will depend on firms'
cost-benefit analysis of taking execution in-house. Although commissions
for algorithmic and DMA trading are the lowest in the industry by far,
firms must also take into account the indirect costs associated with
delay, trade impact and missed trades. At present, the buy-side as a whole
is not yet comfortable navigating the numerous algorithmic strategies at
their disposal. Increased education, in the form of more robust pre- and
post-trade analytics, and hands on assistance from sell-side providers,
will play a large role in expanding algorithmic trading beyond its current
base of users.
Celent predicts that long-term growth opportunities
lie in the fixed income, options, foreign exchange, and futures markets.
Other future trends include increased competition between advanced
execution management platforms and traditional order management systems.
The latter will struggle to remain relevant as advanced execution desks
seek greater flexibility, lower costs and more customizable front ends.
The 36-page report contains 19 figures. A table
of contents is available online.
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