The continuing shift by institutional investors to non-traditional stock trading systems is narrowing spreads of market makers, increasing confidentiality of trading, deepening market liquidity and reducing the need for intermediaries, according to a report by Greenwich Associates.
The report showed strong growth in the proportion of institutions using and planning to use automated exchanges or crossing networks for more of their trading.
In the Nasdaq market, 46% of institutions are now using non-traditional trading systems and doing 21% of all their Nasdaq trading business through these systems. Among large institutions, nearly nine in 10 with annual commission volume of $10 million or more use non-traditional systems.
Percentages are lower in listed markets with 28% using non-traditional systems for transactions in listed stocks. The proportion of large institutions doing so is approaching 60%.
Virtually all large institutions - 98% - said they use or expect to use such systems within the next year. While in 1994, 10% of their trading was through these systems, in 1995, they expect the figure to total 14%.
Commissions on listed stocks increased by 25% in the 12 months ended January 1995, due largely to the increasing volume of shares traded. On OTC shares, the increase was 9%.
Commission rates in aggregate continued their long tradition of decline and institutional investors envision more downward movement in the coming year. The weighted average commission rates declined to 6.1 cents per share from 6.3 cents. Most institutions expect the level to drop to 6.0 cents in the coming year.
Soft dollars, estimated to be a $770 million business, rose about 16% from a year ago.
Large institutions clearly dominate trading. In listed stocks, about 160 accounts collectively generate over 85% of total commissions.
Only 14% of institutions permit short selling of equities. On average, 30% of their holdings can be sold short.
One-third of all institutions currently allow stock lending, primarily through the custodial bank as agent.
The report also detected a "remarkable" rise in the percentage of foreign stocks in American domestic institutional portfolios, despite the declines in most major foreign markets last year. The total rose to $60 billion in 1994 from $40 billion in 1993 and the average international equity investment in these domestic portfolios rose to $185 million from $135 million.
U.S. pension funds in particular expect to increase allocations to foreign equities to 11.2% by 1997 from 8.3%, an estimated $140 billion increase.
About 83% will be actively managed.
The report was based on interviews with over 985 portfolio managers and head traders at 566 large investing institutions in the United States.