Plain vanilla participation algorithms still account for the majority of algorithmic trading volumes in most markets, according to an analysis presented at the 2008 TradingScreen Buy Side Traders’ Conference, held in London on May 23.
Basic algorithms – such as VWAP, TWAP, price in line and volume in line – accounted for 51.2% of a global database of more than six million cash equity transactions collated by TradingScreen, an execution management system vendor, and analysed by Robert Kay, managing director, GSCS Information Services and chairman of the editorial board, The TRADE. ‘Dark liquidity’ algorithms accounted for only 4.9% of transactions.
The analysis also revealed stark geographic differences in the use of execution algorithms. VWAP algorithms were responsible for less than a quarter (24.9%) of all transactions executed algorithmically in the US, but 68.2% of all algorithmic transactions in the Hong Kong equity market. “Use of algorithms is clearly an evolutionary process,” said Kay. “Participation algorithms will inevitably become less important over time.”
The performance of different types of algorithms also varied according to provider and geography, Kay’s analysis showed. VWAP algorithms from different brokers could yield quite variable results within a specific market – even on a single-stock basis – while the same broker’s VWAP algorithm could perform better or worse in different markets. “Execution algorithms are very differentiated tools. To get the best out of them, buy-side traders have to work with them over time and should seek regular input from their brokers,” said Kay.