Buy-side increases critical reception of algorithms as MiFID II comes into play

The TRADE’s 2018 Algo Trading Survey finds MiFID II has heightened critical approach to electronic trading among buy-side firms.

Buy-side firms are becoming increasingly critical of the algorithms and the providers they use as the effects of MiFID II begin to bed in, according to The TRADE’s Algorithmic Trading Survey 2018 for long-only firms.

Conducted during the first few weeks of the new regulatory regime, the survey found that trends are already beginning to emerge as to where long-only firms will be specifically questioning algorithmic capabilities.

With providers rated across 14 separate categories of algorithm performance and functionality, there were decreasing scores metered out by long-only respondents in this year’s survey, although there were year-on-year increases in areas such as execution consulting and dark pool access.

Consulting may have become something of a dirty word on the buy-side as a result of the work required ahead of MiFID II’s arrival, but its role in driving algorithmic understanding and implementation, particularly when it comes to achieving best execution, seems to have been acknowledged by the survey’s respondents.  

The customer support category received the highest score from respondent’s this year, an indication that brokers and others on the sell-side have stepped up their efforts to assist the buy-side with the adoption and usage of new technologies under the new regulatory regime.

According to the survey long-only firms have put down a clear marker as to where their priorities lie when it comes to adopting and using algos, as there is increasing desire in the post-MiFID II landscape for algos that provide greater consistency of execution performance, improve trader performance and are, quite simply, easier to use.

While it was expected that many firms on the buy-side would consolidate their lists of algo providers and brokers, the adoption of multiple algo providers has increased almost across the board, with only those on the smaller end – those with $0.25-$0.5 billion in assets under management (AuM) – reducing the number of algos they use, albeit by a small margin.

From the very small (with up to $0.25 billion in AuM) to the larger players (more than $50 billion in AuM), long-only firms have been taking on more algo providers over the past year, even though most are still hovering around the two to three provider mark, possibly with an eye on the new requirements for best execution that have come into play.

Despite this increase in standards expected of both algorithms and providers, the popularity of automated trading is showing no signs of slowing down and even though the technology continues to grow even more complex under the hood, traders are clearly becoming much more comfortable with the systems which allow them to focus their attention elsewhere while still fulfilling their responsibilities.

The full 2018 Algorithmic Trading Survey for long-only firms can be read in full here.