Reliability and access to dark pool liquidity the main priorities for the buy-side when it comes to selecting algo providers

Across both the UK and Europe, managers are giving their top algorithmic broker almost 30% of their electronic order flow, according to Coalition Greenwich’s research.

When it comes to selecting an algo provider, ease of system use, reliability and quality of technical support was the top consideration for asset managers across both sides of the Channel in 2023 – 71% in the UK and 73% in Continental Europe – according to a Coalition Greenwich report.

Jesse Forster

The next most important priority was access to dark pool liquidity, with 73% of UK respondents and 61% of those in Continental Europe highlighting it as a key factor in selection processes.

“People on dealing desks talk, so you leverage dark-seeking algos instead. You don’t want to see it [your trade] popping up on Twitter,” one market structure specialist told Coalition Greenwich.

Other important considerations amongst respondents included: ‘proven execution quality of algorithms’ (up 5% since 2022, now at 65%), quality of algorithmic trading consultancy (also up 5%, now at 53%), and, in Continental Europe specifically, fast trade execution/low latency (35% in 2023).

This latest finding seemingly confirms that while the arms race for speed is over in the UK, the war wages on across Europe.

Speaking to the significance of this research, Jesse Forster, senior analyst at Coalition Greenwich market structure and technology, said: “In both regions [UK and Europe], managers are rewarding their top algorithmic broker with a whopping 28–29% of their electronic order flow.

“[…] 56% of algo flow from UK managers and 64% from continental desks are ending up with their top three providers.” 

Last year, UK managers traded over a third, 36%, of their order flow by notional value via algorithmic strategies – a number which is expected to grow over the coming years – while high-touch sales trading fell by 3% to 34% and is predicted to see a continued downturn in the future.

However, Continental Europe saw an increase in high-touch usage by the same margin, with e-trading on the up and 45% of their flow expected to be through algos. 

Elsewhere, increased concentration of equity trading volumes is being expedited by a continued transition of trading volumes to electronic execution.

The European equities market saw the total amount of equity commissions earned by brokers on trades fall by 14% in 2023, to $2.21 billion as investors’ commissions flowed to fewer brokers.

“Reduced commissions represent a growing challenge for brokers, especially at a time when investors are directing an increasing share of their existing “wallets” to their top brokers. The continued transition of trading volumes to electronic execution seems to be accelerating the concentration trend,” said Coalition Greenwich.