Who gains from algorithmic trading?
Investment banks need to think carefully about which institutions they market their services to.
The head of algorithmic trading at a leading investment bank recently expressed the following view: “If algorithmic trading is so fundamentally good because it gets such great results, then in any other industry there would have already been a massive swing towards it. The reason why it does not happen in investment banking is because customers just aren’t savvy enough. It is only the smarter customers, the more demanding ones, who are prepared to pay for it. It’s the stupid ones for whom price is everything.”
Is this just a condescending and self-serving argument – or does it have some truth?
Investment banks clearly have something to gain from algorithmic trading or they would not be pushing it so hard. They have spent millions over the years developing execution algorithms to increase automation within their trading desks, and fight off the effects of relentless commission squeezes. Offering some of these directly to clients helps them to recoup some of their investment.
Most of the clients that are in a position to use directly the algorithms that brokers are offering already do some trading for themselves, through direct market access. Offering algorithms to these clients is an attempt by banks to win back some of the revenue they are missing out on from these clients.