Portfolio trades now account for two in five trades initiated by major Us institutional investors, according to a new study of a hundred large American investors, conducted in the early part of this year by Greenwich Associates. “It’s becoming a big game in town,” says Greenwich Associates consultant Jay Bennett.
Portfolio trading now accounts for more than 40% of share trading volume at more than 100 of the largest North American institutional investors, including investment management firms, quantitative funds, hedge funds, and pension funds. North American institutions are using portfolio trading more often for trading international shares, as well as for domestic shares, where the focus of portfolio trading remains. The volume of portfolio trading in U.K. and continental European stocks by U.S. and Canadian-based funds has nearly doubled over the past year – from 9% of volume in 2002 to 16% in 2003. Corresponding volumes in the Asia-Pacific area are also up by half – from 4% to 6% of share volume.
Greenwich says the average institution’s portfolio-trading volume increased nearly 10% from $7.6 billion in 2002 to $8.3 billion in 2003. “Portfolio trading is a cost-effective method for funds to change their exposure to different markets as well as to individual stocks,” explains consultant John Colon. “At 2.5 cents/share, often 2.2 cents/share for the largest users, the cost is less than half of what they normally pay for U.S. agency trades or European basis-point transactions.”
Enthusiasm for portfolio trading is not growing on a risk basis, adds Greenwich. The proportion of domestic portfolio trading done as risk is stable at 25%, according to institutions. The proportion of international portfolio trading done this way declined to 18%, from 23% in 2002.
While the need for institutions to cut costs is the principal driver in the growth of portfolio trading, new technology is making portfolio trading a more efficient and more economical way to do many share transactions.
Two-thirds of all institutions are using “direct access” systems for portfolio trading, and while the proportion of their business done this way remains steady at around 35%, indications are that the volumes being traded in such a way are growing on an individual as well as collective basis.
Consultant John Feng outlines two key advantages of direct access systems. “First, they improve the overall efficiency of the portfolio trader’s workflow, and second, direct access systems give traders an incremental ability to monitor the execution of their transactions,” he says.
Portfolio managers and traders at institutions that actively use portfolio trading saw increases in total cash compensation between 2001 and 2002. Portfolio traders on average reported a 5% increase in total cash compensation between those years, from $175,000 to $185,000 when combining salary and bonus. On average, trader compensation went from $205,000 to $215,000.
From January to March, 2003, Greenwich Associates conducted interviews with 108 institutions in the United States and Canada, including investment management firms, quantitative funds, hedge funds, and pension funds. Interview topics included market trends, service provider assessments, and compensation.