Computerised trading shrinks FTSE 100 deals

THE average trade size of FTSE 100 stocks on the London Stock Exchange (LSE) shrank dramatically during the last year, according to research by Morgan Stanley that sheds light on the effect that automated trading is having on the market.

LSE data shows that the average size of a FTSE 100 trade was just over £6,081 in January 2012, down from £7,817 12 months previously.

The change represents a 22 per cent decline in trade size.

Brian Gallagher, managing director and head of European electronic trading at Morgan Stanley, said that the trend is set to continue: “The average trade size will continue to be atomised as algorithmic trading grows. High-frequency trading firms post quotes in multiple venues, and many brokers have invested in technology that allows them to hit several quotes at one time.

“This has driven marketmakers and high-frequency traders to quote even smaller trades, and the overall trade size will continue to get smaller,” he told Financial News.

Trading is becoming faster and more compact, contrasting starkly with a decade ago when the average trade of FTSE 100 stock on the LSE was around £60,000.

High-frequency traders, also known as black-box players, plug algorithms into computers to generate numerous, lightning-speed automatic trades that are designed to make money from arbitrage on razor-thin price differences and movements.

Over the past ten years it has grown to become the dominant source of liquidity for exchanges and alternative trading systems but it has attracted the interest of regulators.

As a result, exchanges including the LSE, Deutsche Boerse and Nasdaq have all recently announced fines to cut out speculative trading in high volumes that some of the high-speed traders engage in.

The industry hit the headlines in May 2010, when it was blamed for the “flash crash” in the United States, when the stock market plummeted over a 1,000 points, or nearly 10 per cent, in a matter of minutes.