8
$\begingroup$

I saw this study

enter image description here

Why does algorithmic trading account for a significantly higher percentage of trades in the USA than in Europe or Asia?

Is that because US-based exchanges offer more edge to high-frequency trading such as co-location? Is that because financial firms are more technologically advanced in the US than in Europe or Asia? Or some other reasons?

$\endgroup$
9
$\begingroup$

Why does algorithmic trading account for a significantly higher percentage of trades in the USA than in Europe or Asia?

One of the major reasons for this is the significant fragmentation in the U.S. markets, and in particular the U.S equity markets where I believe Aite Group's data (in your picture) comes from. This doesn't necessarily provide an edge to algorithmic trading firms, but the more products are fungible and trade on an arbitrage basis, the more opportunities exist for naive algorithmic trading. You'll see the same behavior even in non-fragmented markets when you compare, say, more fungible products such as equity indices, to agricultural products.

Another major reason is that "algorithmic trading" is loosely defined because it is often difficult to identify volume coming from a black box vs discretionary flow via a smart order router or algorithmic execution desk. Since U.S. markets dominate investor interest and volume across the globe, you'll commonly see that broker-dealers and vendors offer many more services and products for electronic access in the U.S. than in non-U.S. markets. This effect is clear even in the well-known bulge bracket banks. As a result, this difference can also be explained by the availability of such services.

Your questions implicitly suggest that a higher % of algorithmic trading activity is related in some way to the amount of opportunity. I'd be careful of that type of reasoning. The markets are very efficient, even when it comes to business decisions. If it comes down to an advantage so obvious as cheaper colocation services in the U.S., the exchanges and data centers in Europe or Asia could easily court the same business by lowering their prices.

Is that because financial firms are more technologically advanced in the US than in Europe or Asia?

No. The largest participants in the U.S. markets are generally the same as the ones in European markets. This is a highly globalized industry and it's easy for a U.S.-based firm to trade outside of the U.S.

$\endgroup$
-3
$\begingroup$

Euro equities are much more fragmented than the US

$\endgroup$
  • 1
    $\begingroup$ You should elaborate more on your answer. $\endgroup$ – SRKX Jun 7 '17 at 1:24

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.