What Percentage of Trading Is Algorithmic? (Algo Trading Market Statistics Explained)

Since the emergence of the internet, algorithmic trading has come to dominate the financial trading world, but what percentage of trading is actually algorithmic?

About 60-75 percent of overall trading volume in the U.S. equity market, European financial markets, and major Asian capital markets is generated through algorithmic trading, according to Select USA, in 2018. However, the overall trading volume of algorithmic trading in emerging economies like India is estimated to be around 40 percent.

What is algorithmic trading?

Algorithmic trading is a method of trading the financial markets using pre-programmed algorithmic trading strategies to monitor the markets and execute trades. Algorithmic trading facilitates automated trading across all asset classes and market segments. This happens with zero direct human intervention, as the trades are executed based on pre-written instructions.

Here’s how it works: A trader loads his server with trading algos with specific instructions for his trading strategies. The algos monitor the markets, searching for qualifying trade setups, and once they encounter the right setups, they execute the trades and manage them in accordance with the coded instructions.

So, from spotting the trade setups to executing and managing the trades, the entire process is automated. The idea of creating computer programs to trade one’s trading strategies is not just fascinating but has also become the ideal trading approach in recent times.

What percentage of trading is algorithmic?

In the U.S. equity market, European financial markets, and major Asian capital markets, algorithmic trading accounts for about 60-75 percent of the overall trading volume. Algo trading has been on the rise in the U.S. equity markets since the turn of the century but seems to have plateaued around 70-80 percent in the last 5 to 10 years.

In 2003, algo trading accounted for only about 15 percent of the market volume, but by 2010, more than 70 percent of U.S. equity market trading was through trading algorithms. It is also the same in the Forex markets, where algorithmic trading is measured at about 80 percent of orders in 2016 — up from about 25 percent of orders in 2006.

In the UK and EU, only about a third of all stock trades in 2006 were driven by computer trading algorithms, but by 2009, algorithmic trading accounted for 60-73 percent of all equity trading volume, according to study reports. For instance, in 2006, about 40 percent of all orders were entered by algorithmic traders at the London Stock Exchange, and the number was expected to be 60 percent by 2007.

Generally, American markets and European markets tend to have a higher proportion of algorithmic trades than other markets, and the estimate for 2012 was as high as an 80 percent proportion in some markets.

In Asia, Japan has the highest level of algorithmic trading, which accounted for approximately 70-80 percent of all trading in 2019 in the FX spot market transacted on the EBS2 — one of the most commonly used electronic broking systems in the interbank market. In the equity market, more than 70 percent of orders on Tokyo’s stock exchange are now made by algorithmic traders.

However, the contribution of algo trading is much lower in emerging economies. For example, in India, the overall trading volume of algorithmic trading estimated is roughly 40 percent.

Current trends in algorithmic trading

Presently, algorithmic trading is dominated by institutional traders and investors — traders who trade for a group or institution and buy and sell stocks on their behalf. These include pension funds, mutual fund families, insurance firms, and exchange-traded funds (ETFs).

Institutional investors use numerous computer-driven algorithmic strategies to execute and manage their orders. These techniques enable them to cut down the costs of trades and improve their profitability. Algorithmic trading is particularly helpful for high order sizes, which is why institutional investors and large brokerage firms largely make use of it to reduce trading expenses.

Institutional traders currently dominate the algo trading market, and they are expected to hold the major share for a long time. These traders not only trade