The latest market trends and where does the industry go?
Algorithmic trading market trends 2022
One of the main reasons for an increase in algorithmic trading is that investors these days are more focused on risk-free data management and trading strategies. Due to its trade benefits, the algorithmic trading market is expected to grow at a CAGR of 11.2% between 2021 and 2026. Moreover, equities are expected to contribute around $8.61 B in the algorithmic trading market share by 2027.
Similarly, financial institutions have started adopting cloud-based applications to enhance productivity and efficiency. Also investment banks are in the game – Coalition Greenwich states that 12 leading investment banks successfully generated $2 B from algorithmic trading.
But let’s look a bit deeper into what is going on and observe the algo trading market trends 2022.
Institutional investors hold the major market share
Institutional investors comprise of insurance firms, pension funds, exchange-traded funds, and mutual fund families. Multiple researches have shown that institutional investors are expected to hold the major share for algo trading in the coming years. The main reason for that being they highly use algo trading to reduce trade costs as it is helpful with larger orders. High-frequency numbers are not possible every time but algorithmic trading helps reduce large numbers into smaller parts and enables institutional investors to perform those in the specified time intervals. To speed up the daily trades the software powered by artificial intelligence works best for high-frequency traders.
The trading market is volatile and institutional investors use algorithmic trading strategies not only to reduce trade costs but to increase their profits.
Since institutional investors are mostly engaged in high-frequency trading now, it is only possible for them to afford algorithmic trading software. However, they enjoy good profits from algo trading because profit is earned in millisecond arbitrage. Institutional investors are also fond of algorithmic trading as it prevents them from over-trade due to automation. Similarly, it helps prevent any human incurred errors as well. Hence it is a safe investment alternative for institutional investors, and 52% of them believe that workflow efficiency is instrumental while supporting the best execution in algorithmic trading.
North America to dominate the market
North America is currently experiencing a rise in trading technologies, algorithmic trading vendors, and government support for global trading. All of this has predicted North America to emerge as the market leader in algorithmic trading. This means the country will have the highest market share. Interestingly, according to Wall Street, around 60% to 73% of the total US equity trading is done through algorithmic trading. It is also noted that the use of high-frequency trading (HFT) strategies, an algorithmic trading strategy, has increased in the US security markets. Similarly, 10% of hedge funds in Europe and the US used algorithmic trading in 2020 and traded over 80% of their value.
Technology is evolving at a faster pace now and also contributing to the market growth; hence modern technology is also being incorporated into investment trading techniques. The purpose now is to create a safe trading ecosystem for investors. For instance Dex Finance was created in February 2022 as a trading ecosystem for investors. This is a low risk algorithmic trading model which any investor could use with ease and safety.
According to the current statistics and algorithmic trading market trends 2022, the use of algorithmic trading is on the rise. Institutional investors and businesses have started incorporating algorithmic trading strategies instead of solely doing things manually in their usual trade activities. Algo trading was mostly used in Europe or western countries, however, there is a growing trend of algo in South Asia as well. Indian markets have also started to use algorithmic trading for their trading activities, and around 50% to 60% of different entities use algo trading there. It is safe to say that algorithmic trading will continue to grow and expand in the Indian market.
The pandemic forced people to work from home, hence this completely changed their life. This further ignited the use of electronic trading among people. We say this because statistics show that the Covid 19 pandemic has had a positive impact on algorithmic trading. Australia’s Reserve Bank stated that the pandemic caused the industry to move towards electronic trading and decreased the use of conventional trading methods. In other words the pandemic did have a silver lining as it introduced more businesses to algo trading.