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
2008.
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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.
"Trader
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
2009.
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.
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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.
“Quite
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.