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The 2010 Algorithmic
Trading Survey
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The zc1c Algorithmic Trading Survey
T
his year both the accura-
cy and depth of The
TRADEs Algorithmic
Trading Survey increased
markedly. There were over
300 buy-side evaluations of
algorithmic performance
with the results showing
that only one in 10 respond-
ents limited themselves to a
single suite of algorithms,
compared with one in six in
2009. With more buy-side
traders using multiple pro-
viders, there was significant-
ly increased scope for indi-
vidual respondents to be
discriminating in their eval-
uation of respective provid-
ers algo products.
A total of 26 providers of
algorithmic trading suites
were identified and assessed
by the surveys buy-side
respondents. It was striking
just how pervasive the use
of algorithms has become,
particularly among large
buy-side firms with over
$50 billion of assets under
management. This group
typically used algorithmic
trading suites from up to
five sell-side providers, one
more than the previous
year. Across all respondents
to the survey, over 45% of
those questioned used five
or more providers of
algorithms.
The main attraction of
algorithms for the buy-
side, both as a means to
increase trader productivi-
ty and reduce market
impact, has remained
remarkably consistent over
the three-year time horizon
Dark liquidity seeking algos
emerge as best of breed
The TkA0E's rd annual algorithmic trading
survey reveals that the market for algorithmic
trading is flourishing, with buy-side traders
displaying an appetite for more sophisticated
algorithms from a broader band of providers.
TRE TkA0E ISSuE z |Ah-MAk zc1c ;
of the survey. It seems that
however sophisticated the
algo offering, the end result
for the trader remains the
same. The one aspect of
service that no longer elic-
its the attention it received
in 2008 is cost, once the
outstanding preoccupation
of respondents (though tell
that to the head trader of a
major long-only firm in
the UK for whom the big-
gest change in algo per-
formance was the increase
in price over the last six
months).
Overall, the survey
found that close to one in
three buy-side traders is
now using algorithms to
trade more than 40% of
equities order flow, up from
one in four a year ago. In
2008, when the survey
began, fewer than one in 10
respondents used algo-
rithms for such a significant
proportion of order flow.
While this gives a clear indi-
cation of the growing
maturity of buy-side traders
as loyal and
discerning consumers of
brokers electronic trading
goods, it also hints at a reli-
ance on algorithms to clear
the noise during recent
periods of pandemonium
in the market.
5tress-testing a|ges
Market volatility appeared
somewhat of a double-
edged sword for algo users
in 2009. While a number of
respondents observed that it
led to greater dependence on
Market review
The zc1c Algorithmic Trading Survey
Averae scores
0 1 2 3 4 5 6
0 1 2 3 4 5 6
Internal crossing
Results vs pre-trade estimates
Ease of use
Customisation
Price improvement
Anonymity
Speed
Cost
Execution consistency
Reduce market impact
Improve trader productivity
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7 = Excellent 1 = Very weak
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Other: 12.4%
Speed: 9.4%
Ease of use: 7.5%
Price improvement: 6.0%
Reduced market impact: 14.6%
Execution consistency: 9.0%
Trader productivity: 15.0%
Anonymity: 12.0%
Cost: 14.2%
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One in three buy-
side traders is now
using algorithms to
trade more than 40%
of equities order
flow.
;6 TRE TkA0E ISSuE z |Ah-MAk zc1c
Market review
The zc1c Algorithmic Trading Survey
Belgium. The market
extremes of the recent past
had revealed algorithms to
be less dynamic than expect-
ed, he observed, as outages
increased. In general, a lot
of brokers struggle with the
technology, he remarked.
A head trader at a US
long-only/hedge fund firm
said that algos had become
less consistent over the past
year and required higher lev-
els of manual intervention to
remain effective, especially
for smaller-cap names.
Another US trader at a simi-
lar firm lamented the fact
that while Credit Suisses
Guerrilla algorithm was par-
ticularly good for less liquid
names, he was still searching
for something similar from
other providers.
0vertaking vWAP
Three years ago, VWAP was
the outstanding algorithm of
choice for buy-side traders;
easy to understand and sim-
ple to measure, nothing came
close. The algo equivalent of
a workhorse, there was little
love lost, with VWAP algo-
rithms demeaned by survey
respondents as boring and
unimaginative. But VWAP
has remained a popular
choice, buoyed by its simplic-
ity and fittingly described as
the disco music of the algo
world (no one raves about
its subtlety, but it still makes
people get up and dance).
This years survey records the
first notable decline in the
use of VWAP among buy-
algorithms, others noted
that the consistency of algo-
rithmic performance
declined as volatility
increased. There was clearly
less consistency with pre-
trade estimates, commented
an equity trader at a UK
firm that runs both long-
only and hedge fund busi-
nesses. Most algos dont
adapt to volatile markets,
commented the head trader
at a long-only manager in
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For the third
consecutive year,
implementation
shortfall for single
stocks has risen in
popularity.
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Market review
The zc1c Algorithmic Trading Survey
the relative demise of VWAP
speaks less of its unpopulari-
ty it still exhibits enduring
appeal and more of the
growing maturity of buy-side
traders in deploying algo-
rithms as an active part of
their trading strategies. In the
three years since the survey
began, algo usage has evolved
from less sophisticated par-
ticipation strategies such as
VWAP and TWAP to more
complex price improvement
approaches that seek to mini-
mise slippage from a target
price. As a result, for the third
consecutive year, implemen-
tation shortfall (IS) for single
stocks has risen in popularity,
up from 39% in 2008 to 68%
in the latest survey. This
process of natural evolution
was confirmed by one
Australian-based trader who
noted how the firms use of
algorithms had shifted from
schedule-based algorithms,
to more iceberg and
Sniper-styled [an aggressive
tactic that will trade up to the
limit price in a similar fash-
ion to the Credit Suisse algo
of that name] ones to elimi-
nate problems and work to
our adjusted IS benchmark.
Comfort with algorithms
is increasing, evidenced by
client demands for more
advanced variations on exist-
ing strategies. Responding to
the survey, the head of equity
commenting that unstable
market volumes had made
VWAP redundant for long
periods.
Assessed alongside other
types of algorithm, however,
side respondents, down from
64% to 58%. In part, any dip
in the appeal of VWAP algo-
rithms can be attributed to
market volatility, with one
Hong Kong-based trader
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TWAP
Internal crossing
Implementation shortfall
(basket)
Dark liquidity seeking
Participation
Implementation shortfall
(single stock)
VWAP
% of respondents
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20
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averae number of prov|ders
% of respondents
>40% 30 - 40% 20 - 30% 10 - 20% 5 - 10% 0 - 5%
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The demand for algorithms that will assist
traders to deal in size was a recurring theme among
respondents.
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Market review
The zc1c Algorithmic Trading Survey
eliminate the need for my
traders to split an order in
search of liquidity, respond-
ed the head trader at a long-
only firm in Ireland. The
search for a super algo that
can consolidate dark liquidity
on one deal ticket was ech-
oed elsewhere in the survey.
Based upon the commen-
taries received, the buy-side
traders wish list for tomor-
rows algorithms is extensive
and varied, depending in no
small part on the type of
fund under management.
Some expressed a desire for
opportunistic algos that let
the user calibrate minimum
and maximum limits and
utilise smart order routing
based on short-term signals
centred on tick data. A good
few highlighted pairs trading
as a major area of growth for
algorithmic development. If
there is one thing in com-
mon however, it is the gener-
al desire of buy-side traders
to take greater control over
an aspect of trading which,
in the three years since the
survey began, has grown to
become a vital component of
their working lives.
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Algo selection has also been
driven by necessity as market
fragmentation has made
access to competing pools of
liquidity the overriding con-
cern of traders and sharp-
ened the appetite for smart
algos. Just how much this
objective underpins trading
is revealed in the survey, with
dark liquidity seeking algo-
rithms used regularly by
more than 81% of respond-
ents, up from 51% a year
ago. Similarly, albeit from a
low base, there has been a
five-fold increase in the use
of algorithms to take advan-
tage of internal crossing
opportunities, up from 5%
in 2009 to 25% in the latest
period of enquiry.
The clear message from
buy-side respondents was for
more of the same. I want
my algos to get me the best
prices on the most important
available exchanges and cross
up as much flow in dark
pools as possible, comment-
ed the head trader at a
UK-based long-only manag-
er. I want one algo that
searches all the dark pools to
trading at a German long-
only firm called on providers
to increase the functionality
of their algorithmic suites to
allow more volume at
favourable prices. The
demand for algorithms that
will assist traders to deal in
size was a recurring theme
among respondents.
As familiarity with the
existing range of algos
increases, buy-side traders
not only want to deploy
more sophisticated strategies,
they also want to be able to
control the strategic parame-
ters of the algorithms they
use. One Singapore-based
head trader, for example,
wanted the capability to set
aggression levels at different
price points. There was an
often-voiced concern among
respondents that broker algo-
rithms were not tuned to the
trading style of buy-side
firms. Some IS strategies are
too patient on price improve-
ment and too aggressive
when the price is away from
the arrival, commented the
head trader at one UK long-
only/hedge fund manager.
The programs are getting
better at reacting to the stock
moving away. However, the
focus seems to be towards
the aggressive side, as
opposed to patience,
observed the head trader at a
US-based hedge fund.
I want one algo that searches all the dark pools to
eliminate the need for my traders to split an order in
search of liquidity.
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8roker koll of Ronour
8z TRE TkA0E ISSuE z |Ah-MAk zc1c
The zc1c Algorithmic Trading Survey
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Functional capabilities
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"Algorithms have
improved in reliability,
speed and performance."
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TRADEs 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 the 2009 survey.
The change in market
conditions over the year
was dramatic, observes
Boardman. Market volatili-
ty was at once-in-a-genera-
tion highs at the start of
2009, but we are now
almost back to pre-crisis
volatility levels and signifi-
cantly reduced trading vol-
umes, which favours liquid-
ity-seeking strategies rather
than playing it safe with
VWAP strategies.
Seigne at Goldman Sachs
notes that the increase in
the number of non-dis-
played trading venues and a
greater focus on dark
liquidity aggregation and
connectivity in 2009 also
drove the use of these types
of algorithms. Chi-X
Europes Chi Delta, BATS
Europes dark pool and
SmartPool, the non-dis-
played trading venue oper-
ated by NYSE Euronext, are
just three examples of dark
pools owned by trading
venues that launched and
gained significant volume
in 2009.
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8roker feedback
The zc1c Algorithmic Trading Survey
I wouldnt say there is
too much choice, says
Hansmann, but head
traders need to consider
more carefully how they
are going to evaluate the
strategies they use. Quite a
few clients now ask us to
fill out questionnaires so
they can assess the
attributes of specific pro-
viders more effectively.
Detailed evaluation of the
performance of the strate-
gies 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 to the rankings of
service in the 2010 survey
compared to 12 months
previous. Declines in client
satisfaction were most evi-
dent in anonymity and cost,
while buy-side traders
seemed marginally happier
with price improvement
and customisation.
Boardman asserts that
the increased expectations
of traders coupled with an
improvement in the overall
performance of algorithms
across the industry were
two hidden effects within
the ratings on service that
effectively cancelled each
other out.
space and experiment with
new providers, but I think
this will contract over
time, says Self. While
some boutique algorithmic
providers may deliver a
very specialised offering, a
lot of clients will be
putting pressure on their
bigger brokers to fill any
product gaps.
Self argues that this kind
of approach will work out
to be more cost effective for
clients of bulge-bracket
firms that pay for algo-
rithms as part of their
overall broker relationship.
In most cases, we can also
offer a greater level of cus-
tomisation, connectivity to
a wider range of liquidity
venues and a better cus-
tomer service and support
than smaller, niche provid-
ers, he adds.
1JDLBOEDIPPTF
Hansmann at Bank of
America Merrill Lynch
believes a greater choice of
algo providers is an advan-
tage. She observes that buy-
side traders do not typically
use all algorithms included
in a single providers suite,
instead opting for one strat-
egy for a VWAP trade on
Deutsche Brse and another
for a VWAP trade on the
London Stock Exchange, for
example.