According to a report from the Wall Street Journal," the world's biggest investors are changing the way they trade in U.S. markets, bypassing the broader market, as well as other sophisticated order-routing techniques designed to avoid pitfalls that have become increasingly apparent to investment managers".
Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.
The strategies include conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market
Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.
The strategies include conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market
A trade has the possibility of wending its way through 13 exchanges and more than 40 "dark pools," off-exchange trading venues that don't publicly display stock trades. A trade could also be executed inside a large broker-dealer that matches buyers and sellers from its own holdings.
Norway's sovereign-wealth fund, the world's largest at more than $800 billion, is among those executing more upstairs trades. These typically involve institutions negotiating a transaction involving a large chunk of stock through a broker, who may buy the block and resell it or take a fee for conducting the deal.
Mutual-fund giants including Fidelity Investments, Vanguard Group and T.Rowe Price Inc say they are placing greater restrictions on how their external brokers execute trades, given the challenge of getting the best obtainable price for as large a chunk of a big order as possible. A heightened risk of information leaking about orders is an additional concern.
Institutional investors long have complained that market complexity can make trading more difficult and that high-frequency traders were driving up prices by jumping microseconds ahead of big orders.
But big investors say the cat-and-mouse games are growing more elaborate—and counterproductive—by the day.
Proponents of high-frequency trading say that such firms provide much-needed liquidity at a time when trading volumes are diminished. Many participants believe competition between trading venues has reduced costs for most investors.
Still, the Investment Company Institute, a trade organization for mutual funds and other big investors, has hosted a series of conference calls in recent months to discuss market-structure issues with its members.
Regulators also are paying closer attention: The Securities and Exchange Commission launched a website in October to publish data about its research into the consequences of market fragmentation and high-frequency trading. On Oct. 1, the U.S. Financial Industry Regulatory Authority, Wall Street's self-funded watchdog, proposed a rule to increase oversight of dark pools.
