Money managers and internally managed pension funds are expected follow the lead of T. Rowe Price Group Inc. in sending direct equity order flow to high-frequency trading firms, which could chip away at the established use of brokers to direct institutional trades, sources said.
T. Rowe Price in 2015 began directing equity trades to Virtu Financial Inc.
"The T. Rowe-Virtu deal is kind of like the canary in a coal mine, and the canary is doing pretty well," said William R. Harts, CEO of Modern Markets Initiative, a New York electronic and high-frequency trading industry group.
Added Valerie Bogard, equity analyst at TABB Group LLC, New York: "The buy side has gotten more comfortable with high-frequency trading firms, and they weren't before. A lot of their strategies used to make the buy side uncomfortable. But now the buy side understands much better how those firms work and they're ramping up their transaction cost analysis, and HFT firms are providing the liquidity they need."
Ms. Bogard said other large managers have started using high-frequency trading firms since T. Rowe Price announced its move in April 2015 but didn't publicize it. "Most managers release who their brokers are, but not something like HFT firms. But there are other firms that are either already or are likely to begin establishing a direct relationship with high-frequency trading firms."
T. Rowe Price executives said in the past two years the real success of the program has been in finding liquidity — a growing problem for institutions as fewer stocks trade on public markets and more institutional investors move toward passive investing.
"The execution quality has been solid," said Mehmet Kinak, vice president and head of global equity market structure and electronic trading at T. Rowe Price, Baltimore. And although T. Rowe Price only trades a small percentage of its trades through Virtu, Mr. Kinak said, "the level of performance is up there in the top tier." A spokesman for T. Rowe Price said the company does not disclose specifics on trading costs or the impact on trading strategies on returns.