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July 12, 1999 01:00 AM

CATCHING THE WAVE: ELECTRONIC TRADING FUTURE LOOKS FINE; INSTITUTIONAL INVESTORS EMBRACE TREND; USERS UP, BUT VOLUME DOWN

Susan Barreto
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    GREENWICH, Conn. -- Institutional investors' use of electronic trading systems will grow this year, according to a recent Greenwich Associates study.

    For listed and non-listed trades, ECNs such as Instinet, ITG's POSIT, Bloomberg's TradeBook, and OptiMark are capturing about 50% of the trades overall, while they are used in 70% of the trades of "mega-institutions," the report said.

    "When we specifically ask what are the most important trading changes institutions would like or actually plan to make in the near future, some 30% of those giving a positive response talk in terms of electronics, with many specifically mentioning a variety of nontraditional systems," John G. Colon, a partner, noted in the report, "Advances and Anomalies in 'Nontraditional' Trading."

    Of the larger institutional investors surveyed, 21% use TradeBook, 2% OptiMark, 83% Instinet and 61% POSIT. Of that same group, 13% said they were also likely to use Tradebook, 41% Optimark, 7% Instinet and 3% POSIT.

    Of large pension and endowment funds, 11% use TradeBook, 4% OptiMark, 63% Instinet, 34% POSIT. A total of 21% said they would also probably use TradeBook in the future, 30% OptiMark, 13% Instinet and 17% POSIT.

    One of the newer kids on the block -- OptiMark -- may see the largest jump in use, according to Greenwich. About 40% to 45% of larger investors said they would use Optimark, said Jay Bennett, partner in Greenwich's equity practice.

    "The $64 million question is liquidity," he said of all electronic trading platforms.

    The group's research suggests that the more liquidity available, the faster the technology will take off; the more trades done electronically, the more interest will be generated.

    Despite the growth in the number of investors using electronic trading, Greenwich found nontraditional trading volumes decreased in 1998. Mr. Bennett said the reason for decrease was the higher trading volumes and the inability of ECNs to keep up with the NYSE, which sometimes trades in excess of 820 million shares per day. In the future, Instinet and other ECNs may represent a greater fraction of the market because people will not want to exit the new technology, he added.

    The volume of NASDAQ trades done electronically decreased to 15% in 1998 from 20% in 1997. Greenwich predicts the number of trades will increase to 17% in 1999. Nontraditional trading volume among larger institutions is expected to increase to 18%, still below 1997's 21%.

    For listed and international equity trades, volumes are much lower. In 1997, 8% of the volume of listed and international trades was generated from electronic trading, while in 1998 it dropped to 7%, and in 1999 it should reach 9%.

    Money managers doing over $5 million in commissions traded 66% of international and listed stock trades via an electronic trading platform. But of those institutional managers, a trading volume of only 9% is expected to be generated in 1999 for nontraditional trades.

    Meanwhile, the competition may continue to be fierce since consolidation isn't yet on the horizon, according to Greenwich research. Price, as well as execution, plays a part.

    Mr. Bennett has observed that while electronic trading may be cheaper than other forms of trades, at 1 to 3 cents per share, some systems have done trades for free in order to generate volume.

    Depending on the type of trade, the commission for traditional brokerages may range anywhere from 5 to 10 cents a share.

    "Electronic trading will become more and more prevalent whether it becomes cheaper or not," Mr. Bennett concluded.

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