Having discussed market microstructure and the parasitic impacts of high-frequency-trading for the last 5 years, it comes as no surprise that the block-trade-sniffing algos have had very significant impacts on the way institutional investors trade now. As WSJ reports, in fact the big boys are conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market, because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly. While the concerns aren't all new, big investors say the cat-and-mouse games are growing more elaborate - and counterproductive - by the day.

Via WSJ,

Some of the world's biggest investors are changing the way they trade in U.S. markets in response to what they say are rising risks for institutions of their size.

The strategies include conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market, as well as other sophisticated order-routing techniques designed to avoid pitfalls that have become increasingly apparent to investment managers.

Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.

A trade has the possibility of wending its way through 13 exchanges and more than 40 "dark pools," off-exchange trading venues that don't publicly display stock trades. A trade could also be executed inside a large broker-dealer that matches buyers and sellers from its own holdings.

...

The intricacy of the equity markets creates unnecessary steps for large investors and distracts portfolio managers from increasing returns, said Mr. Brooks of T. Rowe Price.

"It's like trying to fill up your gas tank, but you have to go to 15 gas stations," Mr. Brooks said. "By the time you get to the 15th one, they've increased the price because they've heard you were coming. Wouldn't someone rather go to two or three stations and fill up the tank in blocks?"