Ts Algo Survey

7/31/2019 Ts Algo Survey

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This year both the accura-

cy and depth of TheTRADEs AlgorithmicTrading Survey increasedmarkedly. There were over

300 buy-side evaluations ofalgorithmic performancewith the results showing

that only one in 10 respond-ents limited themselves to asingle suite of algorithms,

compared with one in six in2009. With more buy-sidetraders using multiple pro-

viders, there was significant-ly increased scope for indi-vidual respondents to bediscriminating in their eval-

uation of respective provid-ers algo products.

A total of 26 providers of

algorithmic trading suiteswere identified and assessedby the surveys buy-side

respondents. It was striking

just how pervasive the useof algorithms has become,particularly among largebuy-side firms with over

$50 billion of assets undermanagement. This grouptypically used algorithmic

trading suites from up tofive sell-side providers, onemore than the previous

year. Across all respondentsto the survey, over 45% ofthose questioned used five

or more providers ofalgorithms.

The main attraction ofalgorithms for the buy-

side, both as a means toincrease trader productivi-ty and reduce market

impact, has remainedremarkably consistent overthe three-year time horizon

Dark liquidity seeking algosemerge as best of breed

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of the survey. It seems thathowever sophisticated thealgo offering, the end result

for the trader remains thesame. The one aspect ofservice that no longer elic-

its the attention it receivedin 2008 is cost, once theoutstanding preoccupation

of respondents (though tellthat to the head trader of amajor long-only firm in

the UK for whom the big-gest change in algo per-formance was the increasein price over the last six

months).Overall, the survey

found that close to one in

three buy-side traders isnow using algorithms totrade more than 40% of

equities order flow, up fromone in four a year ago. In2008, when the survey

began, fewer than one in 10respondents used algo-rithms for such a significantproportion of order flow.

While this gives a clear indi-cation of the growingmaturity of buy-side traders

as loyal and

discerning consumers ofbrokers electronic tradinggoods, it also hints at a reli-

ance on algorithms to clearthe noise during recentperiods of pandemonium

in the market.

4USFTTUFTUJOHBMHPTMarket volatility appearedsomewhat of a double-

edged sword for algo usersin 2009. While a number ofrespondents observed that it

led to greater dependence on

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!VERAGESCORES

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

+EY

7 = Excellent 1 = Very weak

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7SYVGISJEPPGLEVXW8LI86%()%RRYEP%PKSVMXLQMG8VEHMRK7YVZI]

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%

'*(63&3&"40/4'0364*/("-(03*5).4

One in three buy-side traders is now

using algorithms totrade more than 40%of equities orderflow.


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Belgium. The marketextremes of the recent pasthad revealed algorithms to

be less dynamic than expect-ed, he observed, as outagesincreased. In general, a lot

of brokers struggle with thetechnology, he remarked.

A head trader at a USlong-only/hedge fund firm

said that algos had becomeless consistent over the past

year and required higher lev-

els of manual intervention to

remain effective, especiallyfor smaller-cap names.Another US trader at a simi-

lar firm lamented the factthat while Credit SuissesGuerrilla algorithm was par-

ticularly good for less liquidnames, he was still searchingfor something similar from

other providers.

0WFSUBLJOH78"1

Three years ago, VWAP wasthe outstanding algorithm ofchoice for buy-side traders;easy to understand and sim-

ple to measure, nothing cameclose. The algo equivalent ofa workhorse, there was little

love lost, with VWAP algo-rithms demeaned by surveyrespondents as boring and

unimaginative. But VWAPhas remained a popularchoice, buoyed by its simplic-

ity and fittingly described asthe disco music of the algoworld (no one raves aboutits subtlety, but it still makes

people get up and dance).This years survey records thefirst notable decline in the

use of VWAP among buy-

algorithms, others notedthat the consistency of algo-rithmic performance

declined as volatilityincreased. There was clearlyless consistency with pre-

trade estimates, commentedan equity trader at a UKfirm that runs both long-only and hedge fund busi-

nesses. Most algos dontadapt to volatile markets,commented the head trader

at a long-only manager in

0

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> $50 billion$10 - 50 billion$ 1 - 10 billion< $ 1 billionAll

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For the thirdconsecutive year,

implementationshortfall for singlestocks has risen inpopularity.


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the relative demise of VWAPspeaks less of its unpopulari-

ty it still exhibits enduringappeal and more of thegrowing maturity of buy-side

traders in deploying algo-rithms as an active part oftheir trading strategies. In the

three years since the surveybegan, algo usage has evolvedfrom less sophisticated par-ticipation strategies such as

VWAP and TWAP to morecomplex price improvementapproaches that seek to mini-

mise slippage from a targetprice. As a result, for the thirdconsecutive year, implemen-

tation shortfall (IS) for singlestocks has risen in popularity,up from 39% in 2008 to 68%

in the latest survey. Thisprocess of natural evolutionwas confirmed by oneAustralian-based trader who

noted how the firms use ofalgorithms had shifted fromschedule-based algorithms,

to more iceberg andSniper-styled [an aggressivetactic that will trade up to the

limit price in a similar fash-ion to the Credit Suisse algoof that name] ones to elimi-

nate problems and work toour adjusted IS benchmark.

Comfort with algorithmsis increasing, evidenced by

client demands for moreadvanced variations on exist-ing strategies. Responding to

the survey, the head of equity

commenting that unstablemarket volumes had made

VWAP redundant for longperiods.

Assessed alongside other

types of algorithm, however,

side respondents, down from64% to 58%. In part, any dip

in the appeal of VWAP algo-rithms can be attributed tomarket volatility, with one

Hong Kong-based trader

0 10 20 30 40 50 60 70 80 90

TWAP

Internal crossing

Implementation shortfall(basket)

Dark liquidity seeking

Participation

Implementation shortfall(single stock)

VWAP

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15

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FRESPONDENTS

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The demand for algorithms that will assisttraders to deal in size was a recurring theme amongrespondents.


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eliminate the need for my

traders to split an order insearch of liquidity, respond-ed the head trader at a long-only firm in Ireland. The

search for a super algo thatcan consolidate dark liquidityon 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 extensiveand varied, depending in no

small part on the type offund under management.Some expressed a desire foropportunistic algos that let

the user calibrate minimumand maximum limits andutilise smart order routing

based on short-term signalscentred on tick data. A goodfew highlighted pairs trading

as a major area of growth foralgorithmic development. Ifthere is one thing in com-

mon however, it is the gener-al desire of buy-side tradersto take greater control overan aspect of trading which,

in the three years since thesurvey began, has grown tobecome a vital component of

their working lives.

4FBSDIGPSUIFTVQFSBMHPAlgo selection has also beendriven by necessity as marketfragmentation has madeaccess to competing pools of

liquidity the overriding con-cern of traders and sharp-ened the appetite for smart

algos. Just how much thisobjective underpins tradingis revealed in the survey, with

dark liquidity seeking algo-rithms used regularly bymore than 81% of respond-

ents, up from 51% a yearago. Similarly, albeit from alow base, there has been afive-fold increase in the use

of algorithms to take advan-tage of internal crossingopportunities, up from 5%

in 2009 to 25% in the latestperiod of enquiry.

The clear message from

buy-side respondents was formore of the same. I wantmy algos to get me the best

prices on the most importantavailable exchanges and crossup as much flow in darkpools as possible, comment-

ed the head trader at aUK-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 functionalityof their algorithmic suites toallow more volume at

favourable prices. Thedemand for algorithms thatwill assist traders to deal in

size was a recurring themeamong respondents.

As familiarity with theexisting range of algos

increases, buy-side tradersnot only want to deploymore sophisticated strategies,

they also want to be able tocontrol the strategic parame-ters of the algorithms they

use. One Singapore-basedhead trader, for example,wanted the capability to set

aggression levels at differentprice points. There was anoften-voiced concern amongrespondents that broker algo-

rithms were not tuned to thetrading style of buy-sidefirms. Some IS strategies are

too patient on price improve-ment and too aggressivewhen the price is away from

the arrival, commented thehead trader at one UK long-only/hedge fund manager.

The programs are gettingbetter at reacting to the stockmoving away. However, thefocus seems to be towards

the aggressive side, asopposed to patience,observed the head trader at a

US-based hedge fund.

I want one algo that searches all the dark pools toeliminate the need for my traders to split an order in

search of liquidity.LIEHXVEHIVEXEPSRKSRP]JMVQ


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Functional capabilities

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Bank of America Merrill Lynch

Credit Suisse

Deutsche Bank

0/&4508"5$)

BNP Paribas

Sanford Bernstein

In 2010, buy-side traders cited

improving trader productivity as the

single most important reason for

using algorithms. In an environment

where trading desks are under

expense pressures it should

perhaps not come as a surprise that

getting more trades done with fewer

Survey respondents were asked to provide a rating for each algorithm provider

on a numerical scale from 1.0 (very weak) to 7.0 (excellent), covering 11 functional

criteria. Data taken from over 300 separate evaluations was used to compile the

provider Roll of Honour. In assessing the rankings, the judgements of the various

respondents were weighted according to three components: the value of assets

under management; the proportion of business done using algorithms; and the

number of providers being used. This meant that the most important evaluations

were assigned as much as three times the weight of the least important.

In arriving at the overall Roll of Honour the scores received in respect of each

of the 11 functional capabilities were further weighted according to theimportance attached to each of them by respondents to the survey. The aim is to

ensure that in assessing service provision, the greatest impact results from the

scores received from the most sophisticated and active market participants in

those aspects of service they regard as most important. In addition, there is

close scrutiny of individual responses to ensure that individual assessments that

are very favourable or unfavourable do not distort average scores unduly.

.&"463*/('6/$5*0/"-$"1"#*-*5*&4

1 Roll of Honour recipients are listed in

alphabetical order throughout the survey.


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Within the overall framework of

sharply lower available commissions,

intense competition and new

entrants, it might be expected thatthe scores on this question would be

different from a year ago. The

shakeout is nonetheless dramatic,

with none of the names listed in the

Roll of Honour and Ones to Watch in

2010 featuring 12 months earlier.

Average scores were down, though

still close to 5.50. Scores among the

brokers receiving the greatest

number of responses were quite

close, but it is clear from scoring and

client comments that some

newcomers are using price as an

important competitive differentiator.

This should be a source of concern

for market participants generally

given the ongoing investment

needed to maintain a credible

presence in the business.

"/0/:.*5:

30--0')0/063

Goldman Sachs

J.P. Morgan

Morgan Stanley

0/&4508"5$)

Barclays Capital

Bloomberg Tradebook

In theory algorithms are nothing if

not anonymous. To reduce market

impact and achieve consistent

results they need to be invisible in

the market. In 2009, the average

score of 6.0 across all respondents

suggested a high level of

satisfaction with this criteria across

all providers. The average score in

2010, though still very good, is quite

sharply lower however. Among the

leading providers, scores were quite

algorithmic trading according to

most followers and, as in 2009, was

singled out by buy-side respondents

as the second most importantaspect of service.

Scores achieved across the survey

were largely unchanged, and while

the average was better than 5.0

(which represents general

satisfaction but little more), they

remained perhaps a little

disappointing. However, that may

be a function of client perceptions

of reducing market impact rather

than any failings in the algos

themselves. Interestingly, the

recipients of the Roll of Honour

conclusively outscored the

competition, with the sole exception

of the brokers named as Ones to

Watch in 2010.

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Goldman Sachs

J.P. Morgan

Morgan Stanley

0/&4508"5$)

Barclays Capital

CA Cheuvreux

In the 2009 survey, cost featured as

the most important reason for using

algorithms. This year it figured in

third place, with close to one-sixth

fewer buy-side traders citing cost as

a reason to use algorithms.

Nevertheless, client comments

suggest that some buy-side traders

are still driven primarily by a simple

desire to lower average commission

rates. However, from a provider

perspective the good news is that

such attitudes seem to be in

decline.

people should be a key objective.

Achieving that while simultaneously

generating consistent execution

results needs to be a key goal,therefore, for all algo providers.

The good news for providers is

that clients appear satisfied by the

productivity gains they are

achieving. Average scores across all

survey respondents were highest for

this question, averaging more than

5.50. As might be expected, brokers

with a long history of algo provision

scored well, with Credit Suisse

replicating its performance of a year

ago in this category. Deutsche

Banks inclusion in the category is

also noteworthy since its history in

this space is shorter than some of

the competition. Among other

providers noted in this category,

BNP Paribas stands out, having

devoted considerable effort to

making its algorithms

straightforward for clients to use,

not least by undertaking custom

work to minimise the need for

traders to constantly fine tune

algorithms for each transaction. This

was reflected in the sound scores

they received.

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Credit Suisse

ITG

UBS

0/&4508"5$)

ConvergEx

Instinet

The three providers highlighted in

the 2010 Roll of Honour are the

same as last year. Reducing market

impact is one of the key virtues of


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this is related to improving

productivity by getting trades quickly

into the market. However, it also

reflects perceptions of latency of

trading. Many buy-side traders would

find it hard to quantify latency of

trading but that does not prevent

them having a perception of it. Most

major providers scored at similar

levels in this area, which may reflect

the lack of available measures of

performance. Among the Ones to

Watch however, both Knight and

Bloomberg Tradebook stood out in

terms of the level of scores achieved.

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Credit Suisse

ITG

Morgan Stanley

0/&4508"5$)

Knight Capital

Socit Gnrale

Along with productivity gains, for many

buy-side traders consistency of results

is regarded as a critical benefit to be

gained from using algorithms. This

years results showed a marginal

improvement from 2009. While in

some respects scores remain

disappointing, this needs to be seen in

the context of a year when some

observers expected that market

volatility would render algorithmic

trading models worthless. It is a

testimony to the overall resilience of

these models that average scores

stood firm, comfortably above 5.0.

However, it is possible that the market

turmoil did claim some victims. Scores

varied widely, with the averages across

major providers ranging from 4.69 to

5.45. In such an environment it says

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Credit Suisse

UBS

0/&4508"5$)

Bloomberg Tradebook

Knight Capital

Credit Suisse and UBS proved that

their algorithms are up to speed for

the second year running, and were

joined in this category in 2010 by

Bank of America Merrill Lynch. Speed

was mentioned by around 30% of

respondents as among the reasons

for using algorithms. To some extent

close, albeit at generally lower levels

than in 2009. Among Ones to Watch

the scores varied a good deal more,

suggesting that not everyone is

delivering convincingly against this

standard.

Morgan Stanley, which retained a

leading position in this category for

a second consecutive year, has

always maintained that this aspect

of service, while a basic

requirement, should not be taken

for granted. The inclusion of

Goldman Sachs in the Roll of

Honour suggests how dark pools

are operated may be a factor

influencing client perception and J.P.

Morgan does well to be mentioned.


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13*$&*.1307&.&/5

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Deutsche Bank

ITG

UBS

0/&4508"5$)

Instinet

Macquarie

As a reason to use algorithms, price

improvement has declined by more

than one-third year on year. Whether

this means that clients are

unconvinced that algorithms can

actually deliver better results is less

relevant than the impact that may

have on the marketing approaches

taken by providers. Scores did

manage to get above the 5.0 default

level, but whether this reflects better

perception or lower expectation is not

clear. For some major players it would

seem that clients are genuinely

disappointed, given average scores

well below 5.0. However, of all the

providers, both ITG and UBS were

cited repeatedly in this category,

suggesting that their clients do see

an ongoing opportunity to improve

price performance.

$6450.*4"5*0/

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Goldman Sachs

ITG

UBS

0/&4508"5$)

Instinet

Knight Capital

Customisation continues to be of

limited attractiveness to clients, but

still offers some genuine source of

differentiation. The Roll of Honour

Lynch returned to the Roll of Honour,

and were joined this year by ITG.

*/5&3/"-$3044*/(

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Credit Suisse

ITG

UBS

0/&4508"5$)

None

Scores for crossing were slightly

higher in this years survey than in

2009. However, the scores recorded

in this category were still among the

lowest posted within the survey. Given

the greater sensitivity to crossing

among clients, this is an area where

some providers may need to do more

work in terms of education and

managing client perceptions. Among

the major providers the weakest score

was 3.84, which should be considered

unsatisfactory by any measure, while

the best score was a very creditable

5.84. This difference in perception has

the capacity to be a genuine source of

competitive differentiation. The strong

showing of UBS in the category says

much about its ability to convey a

message that is comfortable for users.

In terms of Ones to Watch there

were insufficient responses to merit

a ranking this year. In some cases,

the capability may not exist; in

others it has simply not been

evaluated sufficiently by clients to

merit a ranking.

much that Credit Suisse alone

repeated its Roll of Honour ranking of

a year ago. Scores also varied widely

among the Ones to Watch in 2010,

with Knight Capital scoring especially

well. Whether such marked

differentiation can be turned into

significant business gains will only

become apparent in next years survey.

&"4&0'64&

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ITG

UBS

0/&4508"5$)

CA Cheuvreux

Nomura

As clients make use of more

algorithmic suites and generally

become more comfortable with

algorithmic trading tools, it would be

logical for them to be less concerned

about ease of use. Moreover, if gains

are to be made in terms of trader

productivity it follows that algos must

be easy to use and, to that extent,

comparing providers allows buy-side

traders to see what really is easy and

what constitutes difficult.

Encouragingly, in this functional

category overall scores remain very

high, albeit slightly lower than in 2009.

It is also noteworthy that the number

of responses citing ease of use grew

quite sharply year on year. In 2010,

both UBS and Bank of America Merrill


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names, including ITG, which

featured last year, clearly do satisfy

clients based on generally solid

scoring. Other brokers, however,

achieved average scores of below

5.0. This may reflect a lack of

capability or simply disinterest on

behalf of their clients. Among Ones

to Watch in 2010, both Knight

Capital and Instinet scored

extremely well. Whether this can be

transferred into significant new

business remains to be seen, but

certainly some brokers believe this

is still a valuable avenue to pursue.

$0/4*45&/$:8*5)

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Goldman Sachs

ITG

UBS

0/&4508"5$)

Knight Capital

Nomura

Given the clear desire for predictability

of results, it is perhaps surprising that

so few clients view consistency with

pre-trade estimates as a factor in

selecting algorithmic trading suites.

Since the average scores achieved

were the lowest in the survey, it would

seem that clients have simply given

up on pre-trade estimates and

assume that actual results bear no

correlation to them. The Roll of

Honour names however, did score

materially better than others, so for

them at least an element of client

belief in the data remains intact. It is

also worth noting that Nomura, which

focuses a good deal on pre-trade

analysis, also scored well among the

Ones to Watch.

Overall performance

As well as considering the functional capabilities of algorithm providers, the

survey also assessed overall performance as measured across all capabilities,

among five different groups of respondents. This analysis took account of both

un-weighted and weighted scores based on the different levels of importance

attached to the various aspects of service covered in the survey.

.&"463*/(07&3"--1&3'03."/$&

"4*"/$-*&/54

30--0')0/063

Citi

Credit Suisse

UBS

0/&4508"5$)

ITG

Macquarie

In 2009, responses to the survey

from Asian clients were too few to

categorise providers. This year the

number of responses has increased

and for a few brokers at least they

are sufficient to make a realistic

assessment. It is interesting to note

the strong showing of Citi among

this client group, while the

accompanying Roll of Honour

recipients are not surprising.

Average scores among Asian clients

were generally satisfactory but

weaker than those seen in other

regions. In part that may reflect the

nature of the markets involved as

well as the fact that usage of

algorithms among Asian managers

remains less well developed,

though growing. It is also worth

noting that Macquarie, one of the

few indigenous Asian providers,

received a number of strong scores.

&6301&"/$-*&/54

30--0')0/063

Credit Suisse

Deutsche Bank

Morgan Stanley

0/&4508"5$)

Barclays Capital

CA Cheuvreux

After the UK, continental European

respondents were more numerous


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-&"%*/($-*&/54

30--0')0/063

Bank of America Merrill LynchITG

UBS

0/&4508"5$)

Instinet

J.P. Morgan

The weighting of leading clients is not

based on size of assets alone, though

that is one component. The others

are the extent to which clients use

algorithms within their business (i.e.

the proportion of trading done using

algos) and the number of providers

they actually use. This makes them

arguably the most knowledgeable

and experienced respondents, with

the greatest ability to compare and

contrast the different service

providers. ITG was among the Ones to

Watch in 2009. Based on the latest

findings, increased market

penetration among respondents has

led to ITG being included in the Roll

of Honour for the first time. In what

should be recognised as a very

creditable achievement, both Bank of

America Merrill Lynch and UBS once

again feature in the Roll of Honour

among the group of leading clients.

Ones to watch in 2010 are J.P. Morgan

and Instinet, having beaten off strong

competition from Bloomberg

Tradebook in this category.

of Honour, while Bank of America

Merrill Lynch also maintains its

standing and reputation among UK

clients despite the ownershipchanges it has undergone.

64$-*&/54

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Credit Suisse

Goldman Sachs

0/&4508"5$)

Instinet

Pragma

As well as being the most

experienced users of algorithms, US

clients are also the most satisfied

with the performance of providers

based on the scores awarded. Bank

of America Merrill Lynch retains its

Roll of Honour ranking from 2009,

but is joined this year by Goldman

Sachs and Credit Suisse, with

Morgan Stanley scoring less well

this year. It is interesting to note

that trader productivity scored very

highly among this respondent

group, suggesting that as clients

gain in maturity and confidence

using algorithms the real pay-off

can begin to be appreciated.

Among the Ones to Watch in 2010

both Pragma and Instinet achieved

extremely high scores, albeit from a

smaller reference group.

than those of any other region.

Scores were higher than those seen

in Asia, but still behind the UK and

North America. The main providersare seen as being North American

in origin, even when they are Swiss.

With the exception of Deutsche

Bank, the survey found that

indigenous European banks have

yet to make significant inroads,

based upon the number of

responses received. As in Asia,

indigenous providers do appear to

be well regarded, however, as the

scores for Barclays and, especially,

CA Cheuvreux attest. But however

well regarded they may be among

their clients they are not yet among

the leaders in terms of overall

responses received.

6,$-*&/54

30--0')0/063


Instinet

UBS

0/&4508"5$)

Bloomberg Tradebook

J.P. Morgan

UK clients comprise the largest

group of respondents in the survey.

They have also been exposed to

algorithmic trading more than any

other group outside of North

America. Scores are generally strong

and above average, which suggests

that familiarity breeds a measure of

comfort and satisfaction. The

inclusion of Instinet in the Roll of

Honour represents the fact that the

overall survey responses they

received tended to be concentrated

in the UK and were generally good.

UBS retains its position in the Roll


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As 2009 loomed on the

horizon, buy-side trad-ers could have been forgiv-en for leaving algorithms

on the sidelines for fear thatthey would not be able tocope with the unprecedent-ed levels of intra-day vola-

tility unleashed byLehmans collapse.

And many did just that,

for a while at least. But adearth of liquidity and cap-ital in early 2009 meant that

a large number of buy-sidetraders had little choice butto work with the tools they

had to exercise greater con-trol over their executions.

In the US, TABB GroupsInstitutional Equity Trading

2009/2010 report noted thatthe surge in trading vol-umes in Q4 2008 had

forced traders into trusting

algorithms more extensively

to handle the sheer volumeof trades as positions wereunwound furiously. The

percentage of US institu-tional order flow directedvia broker algorithmsincreased to 31% in 2009

from 24% 2008 and TABBpredicts it will rise higher,to 36%, in 2010.

The importance of algo-rithms in times of high vol-umes is echoed in The

TRADEs 2010 AlgorithmicTrading Survey. Trader pro-ductivity was the most fre-

quently cited reason for usingexecution algorithms in 2009by survey respondents.

4VJUZPVSTFMGTrader productivity was abig focus for our algorith-

mic clients during 2009. We

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have enabled our clients toleverage our quantitativeskill set and unique liquidi-

ty to provide them withsimplified, comprehensivetrading solutions to maketheir execution process

more efficient, commentsMichael Seigne, head ofEuropean algorithmic trad-

ing, Goldman Sachs.Though ranked less

highly than trader produc-

tivity by survey respond-ents, ease of use was also acommon theme for

Goldman Sachs clients. Ifa client, for example,always wants to split a por-tion of their order to inter-

act with non-displayedliquidity in a certain waywe will work with them to

reduce the number ofparameters they need tothink about before sending

us an order, he adds.According to Yvonne

Hansmann, head of execu-

tion sales, EMEA at Bank ofAmerica Merrill Lynch, cus-tomisation was an increas-ingly important differentia-

tor for clients last year. Sheobserves that more clientswere working individually

with their sell-side

counterparts to create theirown specific strategies fromscratch.

Clients no longer wanta simple off-the-shelf prod-uct, says Hansmann. Theywant customised strategies

tailored to suit their tradingstyle and this is undoubted-ly where they receive the

greatest benefits from algo-rithmic trading.

While some ask for rela-

tively simple tweaks, likechoosing which liquidityvenues they connect to,

Hansmann says many moreare starting with a blanksheet of paper and workingwith their brokers to deter-

mine the best algo strategyto suit their desiredbenchmarks.

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Volatility levels fell in early-

to-mid 2009 but volumeswere slow to pick up. Buy-side traders adjusted the

strategies they used accord-ingly, says Rob Boardman,head of electronic trading,Europe, at agency broker

ITG, noting the sharp risein the use of liquidity-seek-ing algorithms from 12

months previously. The

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We continue to focuson adapting our crossing

process and liquidity strate-gy, including our non-dis-played pool, SIGMA, to

help our clients re-aggre-gate liquidity. The quality ofthe liquidity continues to be

paramount in determiningwhich destinations we con-nect to, says Seigne.Augmenting liquidity in

this way continues to helpour clients executionquality.

4QPJMUGPSDIPJDFCustomisation and a greater

awareness of when toemploy specific algorithmicstrategies are signs that

buy-side firms are becom-ing increasingly attuned tothe electronic trading envi-ronment and able to make a

better critical judgement ofthe tools offered to them.

With so many algorith-

mic providers in the market 26 were reviewed byrespondents to The

TRADEs 2010 AlgorithmicTrading Survey buy-trad-ers are not short of choice.

This wealth of alterna-tives was highlighted in thenumber of individual sup-pliers of algorithms used by

the buy-side traders thatparticipated in the survey. Atotal of 45.7% of respond-

ents used five or more

providers last year, com-

pared to 40.5% in 2008.However, Owain Self,

head of algorithmic trading

for EMEA and the Americasat UBS, believes that nowlarge sell-side firms have

started to rebuild, buy-sidetraders will start to consoli-date their algorithmicproviders.

During the turmoil,traders were looking todiversify the relationships

they had in the algorithmic

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TRADEs 2010 AlgorithmicTrading Survey found that

internal crossing algorithmswere used by 25% ofrespondents compared to

5% the previous year, while82% used dark liquidity-seeking strategies compared

to 51% in the 2009 survey.The change in market

conditions over the yearwas dramatic, observes

Boardman. Market volatili-ty was at once-in-a-genera-tion highs at the start of

2009, but we are nowalmost back to pre-crisisvolatility levels and signifi-

cantly reduced trading vol-umes, which favours liquid-ity-seeking strategies rather

than playing it safe withVWAP strategies.

Seigne at Goldman Sachsnotes that the increase in

the number of non-dis-played trading venues and agreater focus on dark

liquidity aggregation andconnectivity in 2009 alsodrove the use of these types

of algorithms. Chi-XEuropes Chi Delta, BATSEuropes dark pool and

SmartPool, the non-dis-played trading venue oper-ated by NYSE Euronext, are

just three examples of dark

pools owned by tradingvenues that launched andgained significant volume

in 2009.


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I wouldnt say there istoo much choice, says

Hansmann, but headtraders need to considermore carefully how they

are going to evaluate thestrategies they use. Quite afew clients now ask us to

fill out questionnaires sothey can assess theattributes of specific pro-viders more effectively.

Detailed evaluation of theperformance of the strate-gies they utilise is where

execution consulting andtransaction cost analysiscapabilities add real value

for the client.When rating algorithm

performance, however,

there were only smallchanges to the rankings ofservice in the 2010 surveycompared to 12 months

previous. Declines in clientsatisfaction were most evi-dent in anonymity and cost,

while buy-side tradersseemed marginally happierwith price improvement

and customisation.Boardman asserts that

the increased expectations

of traders coupled with animprovement in the overallperformance of algorithmsacross the industry were

two hidden effects withinthe ratings on service thateffectively cancelled each

other out.

space and experiment withnew providers, but I think

this will contract overtime, says Self. Whilesome boutique algorithmic

providers may deliver avery specialised offering, alot of clients will be

putting pressure on theirbigger brokers to fill anyproduct gaps.

Self argues that this kind

of approach will work outto be more cost effective forclients of bulge-bracket

firms that pay for algo-rithms as part of theiroverall broker relationship.

In most cases, we can alsooffer a greater level of cus-tomisation, connectivity to

a wider range of liquidityvenues and a better cus-tomer service and supportthan smaller, niche provid-

ers, he adds.

1JDLBOEDIPPTF

Hansmann at Bank ofAmerica Merrill Lynchbelieves a greater choice of

algo providers is an advan-tage. She observes that buy-side traders do not typically

use all algorithms includedin a single providers suite,instead opting for one strat-egy for a VWAP trade on

Deutsche Brse and anotherfor a VWAP trade on theLondon Stock Exchange, for

example.

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Algorithms have

improved in reliability,speed and performance,says Boardman. Among our

client base, price improve-ment was not always con-sidered as important as con-

sistency of performance, asclients that have manytrades to complete want adependable outcome.

Traders are now more adeptat asking the right questionsto get the algorithmic per-

formance they expect.

Ts Algo Survey

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Transcript of Ts Algo Survey