The TRADE 56 - Page 78

[ A L G O R I T H M I C T R A D I N G S U R V E Y ] “Trading in the dark has also been a hot topic within the context of the new regulations and its importance is clearly being recognised.” merely be testing the waters and shopping around for the best func- tionality before settling on long-term strategic relationships with select providers in future, but it will be interesting to see what the results in 2019’s version of the survey show. Shifting favour In terms of how much hedge funds have been using algos over the past year, there were some interesting changes regarding how much value was traded in this manner, as shown in Figure 5. Last year showed hedge funds were more likely to predominantly use algos for their trading strategies – over 20% of respondents said more than 80% of value traded was via algo – or for more specialised purpos- es with around 20-30% of value MEASURING FUNCTIONAL CAPABILITIES Survey respondents (both long-only and hedge funds) were asked to give a rating for each algorithm provider on a numerical scale from 1.0 (very weak) to 7.0 (excellent), covering 14 functional criteria. In general, 5.0 is the ‘default’ score of respondents. In total, more than 30 providers re- ceived responses and the leading banks obtained dozens of evaluations, yielding thousands of data points for analysis. Only the evaluations from clients who indicated they that they were engaged in managing long-only firms or hedge funds have been used to compile the provider profiles and overall market review information. Each evaluation was weighted according to three characteristics of each respondent: the value of assets under management; the proportion of business done using algorithms; and the number of different providers being used. In this way the evaluations of the largest and broadest users of algorithms were weighted at up to three times the weight of the smallest and least experienced respondent. Due to the changing market conditions as a direct result of the intro- duction of MiFID II, the researchers decided to reinstate short profiles of the leading providers, which were not included in the 2017 edition of the survey. Each profile outlines their share of responses, including a compar- iso n with 2017 and the overall survey outcomes. Finally, it should be noted that responses provided by affiliated entities are ignored. A few other responses where the respondent could not be properly verified were also excluded. We hope that readers find this ap- proach both informative and useful as they assess different capabilities in the future. 78 // TheTrade // Summer 2018 traded via algo. This year, hedge funds seem to have shifted their strategies in favour of algo trading, with a significantly higher proportion of respondents indicating that more value has been traded using algos. Just under half of hedge fund respondents said algo trading rep- resents over 60% of value traded, while even the more modest range from last year increased, with over 15% of respondents saying 30-40% of value traded was conducted via algo. Clearly the increasing importance of easy-to-use and consistent algos is driving hedge funds to use this method for more of its trading activity, although this may again come back to firms adopting mul- tiple algos from different providers in the short-term before reducing the volume of those relationships. When it comes to which types of algos hedge funds are choosing to use within their trading strategies, this year’s survey showed a similar attitude to long-only firms, dis- played in Figure 6, whereby a move away from dark liquidity seeking algos was the most significant trends. In last year’s survey over 70% of hedge fund respondents said they used these types of algos and that proportion fell to around 58% this year, while there were also significant decreases in firms using participation based and im- plementation shortfall (both basket and single stock) algos, whereas TWAP and VWAP algos saw relatively consistent usage. The increase in using algos under the “Other” category may indicate that firms are embracing new algo types