Equity Trading Practices and Market Structure: Assessing Asset Managers’ Demand for Immediacy

Abstract

Practitioners and students of the securities markets widely assume that traders demand immediate execution of their orders. However, little hard evidence exists about the demand for immediacy. This monograph analyzes the issue and presents the results of the responses to a questionnaire that we have sent to equity traders through TraderForum of the Institutional Investor. The respondents manage in total a very significant percentage of equity assets under management in the United States. The focus of the questions was the extent of the demand for immediate execution of orders. We found that the majority of traders are willing to trade patiently if this reduces execution costs. Many traders indicate that they frequently delay trades to obtain better prices. Most respondents indicate that they are typically given more than a day to implement a large order, that they typically break up more than 20% of their large orders for execution over time, and that they regularly take more than a day for a large order that has been broken into lost to be executed completely. There is a generally positive view of alternative electronic trading systems, such as Instinet and Investment Technology Group’s POSIT. The key motives for trading on these systems are reduced market impact, lower spreads, better liquidity, and anonymity. Changes that would make alternative electronic systems more attractive are an increase in execution rates and more convenient times of trading. Also, alternative electronic systems would be used more if the traders did not have soft dollar arrangements.