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The algorithms are coming

Europe's equity and bond traders had better watch out.

One new study suggests US banks will be targeting both Europe and Asia for expansion in algorithmic trading next year. Another predicts an increase in algorithmic trading for bonds.

"There's a definite maturing of the market for algorithmic trading in the US," says Brad Bailey, a consultant at research firm the Aite Group, and author of the report. "As a result, there's tremendous interest in moving into new markets where the appropriate framework has been set up from an electronic trading perspective."

Bailey says Europe and Asia are just those markets. He predicts 33 per cent of US equity trading will have been conducted algorithmically in 2006, up from 28 per cent last year. By comparison, he ranks the uptake of electronic trading 'less' in Europe and 'considerably less' in Asia.

Experience suggests algorithmic trading programmes (which place and execute orders automatically) are bad news for the human beings they replace. Both Goldman Sachs and Morgan Stanley have jettisoned staff after increasing their use of algorithms.

Bailey says the traders who do well under the machines will be those with more than a passing acquaintance with mathematics. "People who are being hired for trading desks are increasingly quantitatively savvy. There will be a movement of jobs in their direction and away from the classic market maker who calls a friend."

Coming to a bond market near you

At the same time, the bond market, which has so far managed to elude the algorithmic trading trend - and any related job losses, may soon be looking for a few quantitative traders of its own. A study by the Bond Market Association reported last week in Financial News suggests 40% of buyside managers are expecting electronic bond trading to increase dramatically in 2007.

The government bond market is seen as more likely to embrace algorithmic trading than the more complex credit markets. Treasury dealers beware.

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