[ A L G O R I T H M I C
T R A D I N G
S U R V E Y ]
Methodology
Long-only buy-side survey respondents were asked to give a rating for
each algorithm provider on a numerical scale from 1.0 (very weak) to 7.0
(excellent), covering 15 functional criteria.
In general, 5.0 is the ‘default’ score of respondents. In total, just under
30 providers received responses and the leading providers obtained doz-
ens 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 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.
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.
consolidation is starker in Figure 4,
which shows the average number
of algo providers used by long-only
respondents regardless of AuM.
There was a significant drop of just
over 10% for firms choosing to use
five or more providers in this year’s
results, while there was a similar
percentage increase of firms using
just a single provider. The two
extremes of the scale accounted for
57.43% of responses, indicating that
buy-side firms are moving towards
the polar opposites of the scale
now that focus has shifted away
from regulatory matters; buy-side
firms are either looking for a wider
range of options when it comes to
78 // TheTrade // Spring 2019
algo trading or have refined their
choices to a provider they know
can deliver.
Rising popularity
The virtues of adopting algorith-
mic trading strategies, blended
with the human expertise element
traders will always bring to the
desk, have long been extolled by
providers and asset managers using
this approach alike. Both the run-
up to and first year of MiFID II
has somewhat forced the buy-side
to learn more about the algos they
use, particularly where automated
trading intersects with compliance
obligations, but also how to get the
“Long-only firms
continue to adopt and
utilise algos for the
same reasons as they
have done historically,
despite the change
in the regulatory
landscape.”
most of it algo strategies.
The shifting popularity of algo
trading can be seen in Figure 5,
which tracks the volume of values
traded by algorithm for long-only
respondents. While there were
minor fluctuations for firms that
are using algos for less than 20%
of the value traded, there was a
noticeable decline of 10% of firms
in the 20-50% of value traded
bracket. There was a large upturn
in firms using algos for more than
half of value traded, a total increase
of over 13% year-on-year and ac-
counting for over 50% of long-only
responses. Clearly those buy-side
firms that have placed algo trading
at the centre of their strategies are
ramping up their use coming out of
the regulatory upheaval period and
it will be interesting to see how far
this trend could continue in next
year’s survey.
In terms of the types of algos that
long-only firms are choosing to use,
Figure 6 shows a reversal of the
results seen in last year’s survey.
The use of implementation short-
fall (single stock) and VWAP algos