Asset managers are increasingly including order routing in their best execution due diligence as equity volumes shift to algorithmic trading.

Consultancy Greenwich Associates said in a report yesterday that large institutions are shifting trading volume to algorithmic avenues of execution which has kept the overall commission pool flat. The annual pool of cash equity commissions paid by institutional investors to brokers on US equity trades was $9.65bn (€8.7bn), down more than 30% from its peak in 2009 but 4% more than the low of $9.3bn reported in 2013.

The largest commission-generating accounts participating in the study increased their use of algorithmic trading strategies/smart-order routing algorithms by almost 10% between 2015 and 2016. Greenwich Associates interviewed 223 US equity portfolio managers and 321 US equity traders between November 2015 and February 2016 for the report ‘Flat E-Trading Volumes in U.S. Equities Mask Increase Among Larger Accounts’.

Greenwich added that although notional dollar volumes traded via algorithms have not been more than a third of total volume since 2012, recent bouts of volatility and the approval of IEX’s exchange application are likely to force a refocus on the use of algo-driven routing logic to help navigate an increasingly complex market structure.

The US Securities and Exchange Commission controversially approved IEX Group as a stock exchange last month. The venue, featured in bestseller “Flash Boys” incorporates a speed bump – a 350 microseconds delay between matching an order and publicly displaying the match – in order to make it more difficult for high-frequency trading strategies to interact with its order flow.

Pragma Securities, a provider of algorithmic trading tools, also said in a report yesterday that the buyside is paying increasing attention to order routing practices.

“This increasing diligence is appropriate,” said Pragma. “Ultimately most high-touch order flow also ends up being traded algorithmically, and algo routing logic can compromise execution quality for high-touch trades in the same ways as self-directed trading.”

Pragma has launched TradeBase, a database that provides clients real-time access to their algorithmic order messages for analysis in their trading, risk management and compliance systems.

David Mechner, chief executive of Pragma Securities, said in a statement: “TradeBase provides our clients convenient, real-time access to their trading data so they can incorporate it into their own processes and tools with minimal friction, and can conveniently track their order in detail from their order management system to the street.”

Pragma’s broker clients can use the data to customize routing as requested by buyside customers.

“This approach not only offers full transparency and control over order routing practices that will satisfy increasing due diligence from the buyside, but it also allows brokers to create a unique client-facing algorithmic offering in a manner until recently was available only to the bulge brackets and algorithmic specialists,’ added Pragma.

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