Buy-side defies tough markets with greater algo usage – The TRADE survey

Despite challenging market conditions, the buy-side traded a greater proportion of their equity flow using algorithms in 2009, with many favouring liquidity-seeking strategies, according to The TRADE’s 2010 Algorithmic Trading Survey.
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Algo illustration pale blue pink

align=”left”>Despite challenging market conditions, the buy-side traded a

greater proportion of their equity flow using algorithms in 2009, with many

favouring liquidity-seeking strategies, according to The TRADE’s 2010

Algorithmic Trading Survey.

More than 30% of respondents to the survey, which polled

algo usage of buy-side traders in a four-month period from October last year, claimed

to use algorithms for more than 40% of their total value traded (see figure

one), up from 26% in the previous year’s survey.

Some market observers had expected traders to pare back use

of algorithms for fear that they would not be able cope with the unprecedented

levels of intra-day volatility unleashed by Lehman’s collapse in September


Usage by value traded


However, a dearth of liquidity and capital in the early part

of 2009 meant traders had little choice but to work with the tools they had to

exercise greater control over their executions and free up traders’ time to

focus on difficult trades. Sell-side firms echoed the importance placed by

their clients on trader productivity, the most frequently cited reason for

using algorithms by survey respondents.


productivity was a big focus for our algorithmic clients during 2009. We have

enabled our clients to leverage our quantitative skill set and unique liquidity

to provide them with simplified, comprehensive trading solutions to make their

execution process more efficient," commented Michael Seigne, head of

European algorithmic trading, Goldman Sachs.

While volatility started to drop in a number of developed

markets from early-to-mid 2009, volumes were slow to pick up. With hunting

liquidity a top priority, buy-side traders had to adjust the strategies they

used accordingly. The TRADE’s 2010 Algorithmic Trading Survey found that

internal crossing algorithms were used by 25% of respondents compared to 5% the

previous year, while 82% used dark liquidity-seeking strategies compared to 51%

in 2008 (see figure two).

“Market volatility was at once-in-a-generation highs at the start of

2009, but we are now almost back to pre-crisis volatility levels and

significantly reduced trading volumes, which favours liquidity-seeking

strategies rather than playing it safe with VWAP strategies,” said Rob

Boardman, head of electronic trading, Europe, at agency broker ITG.

An increase in the number of non-displayed trading venues

and a greater focus on dark liquidity aggregation and connectivity in 2009 has

also driven the use of such algorithms. Chi-X Europe’s Chi Delta, BATS Europe’s

dark pool and SmartPool, the non-displayed trading venue operated by NYSE

Euronext, are just three examples of exchange-owned dark pools that launched in


The growth in buy-side order flow directed via algorithms and

a greater awareness of when to employ specific algorithmic strategies are signs

that a wider number of buy-side firms are becoming accustomed to the electronic

trading environment and able to make a better critical judgement of the tools

offered to them.

With so many algorithmic providers in the market – more than

25 were reviewed by respondents to the 2010 Algorithmic Trading Survey –

buy-traders are not short of choice. This wealth of alternatives was

highlighted in the number of individual suppliers of algorithms used by the

buy-side traders that participated in the survey. A total of 45.7% of

respondents used five or more providers last year, compared to 40.5% in 2008.

Types of algo used


Yvonne Hansmann, head of execution sales, EMEA, Bank of

America Merrill Lynch, believes a greater choice of algo providers is an

advantage. She observes that buy-side traders do not typically use all

algorithms included in a single provider’s suite, instead opting for one

strategy for a VWAP trade on Deutsche Börse, for example, and another for a

VWAP trade on the London Stock Exchange.


a few clients now ask us to fill out questionnaires so they can assess the attributes of specific providers more

effectively,” she said. “Detailed evaluation of the performance of the strategies

they utilise is where execution consulting and transaction cost analysis

capabilities add real value for the client.”

When rating algorithm

performance, however, there were only small changes compared to 12 months

previous. Declines in client satisfaction with algo quality were evident in

anonymity and cost, while buy-side traders seemed marginally happier with price

improvement and customisation.

Boardman asserts that the increased expectations of buy-side

traders, coupled with an improvement in the overall performance of algorithms

across the industry, were two hidden effects on performance perceptions that

effectively cancelled each other out.

“Algorithms have improved in reliability, speed and performance,” said

Boardman. “Among our client base, price improvement was not always considered

as important as consistency of performance, as clients that have many trades to

complete want a dependable outcome. Traders are now more adept at asking the

right questions to get the algorithmic performance they expect.”

The full results of The TRADE’s 2010 Algorithmic Survey will

be published in the forthcoming Q1 2010 issue of The TRADE.