Fewer off-the-shelf tools in the buy-side's shed
conditions variable, I seem to be using more algorithms than ever. Am I alone?
Not at all. Preliminary results from The TRADE’s Algorithmic
Trading Survey 2012 suggest more traders are using more algos in more
situations. Unsurprisingly, in response to such a widening diversity of
application and a broadening of the church of users, providers are touting new
and innovative wares, bringing increased choice and versatility to the
electronic trader’s weaponry.
But with tougher trading conditions, pronounced volatility
and scarce liquidity, come reduced budgets for buy-side trading desks ever
aware of cost – especially when there’s no end in sight for the hard times. Typically,
this means using fewer algo providers and making algorithms work harder to get
the job done.
But that trend looks to be changing considerably, and market
chatter suggests the larger buy-side houses are retaining more tools in their shed,
not fewer. Instead of pushing a few choice tools harder, they now seem to want
the best algo for any particular trade. But they want many to choose from.
So what’s the most
popular algo at the moment?
According to The TRADE’s 2012 Algorithmic Trading Survey, of
all the implements in the shed, opportunistic algos have continued to grow in
popularity over the past 12 months. This largely came down to unpredictable conditions
in Q2-Q3 2011 dictating people depart from old faithful industry standards like
VWAP and POV in favour of algos which actively hunted for liquidity. Combined
with a year characterised by low volumes, opportunistic algos simply made more sense.
While algorithmic trading strategies were initially developed
for large cap stocks where liquidity is historically easier to access, as the
technology matured and as users became more comfortable with the greater
sophistication of electronic trading, small cap algos have started to increase
in popularity. Volatile markets and liquidity problems have led portfolio
managers to search for alpha outside of the main markets and in response, brokers
are providing them with algos fit for purpose.
What’s in store for
Customisation seems to be the trend. When developing and
marketing their offerings, brokers are increasingly emphasising their ability
to customise an algorithm for whatever unique requirements a buy-side firm may
demand. But customisation takes many forms. While some buy-siders become sufficiently
au fait with algos to tweak the dials to get the performance they want, others
are utilising the execution consulting capabilities of brokers to design bespoke
tools that require little or no tweaking on a day-to-day basis. Still others,
we’re told, are taking the route previously pioneered by high-frequency traders
and quant-based hedge funds – designing their own algos and just using brokers’
pipes to get to their venues of choice.
The TRADE’s 2012 Algorithmic Trading Survey – full results
of which will be published shortly in our Q1 2012 issue – reflects the
importance of ease of use, while almost self-evidently the ability of an algo
to access liquidity at the best price remains critically important, with portfolio
managers needing all the help they can get. With the volume and depth of
execution data now available to the buy-side, perhaps the biggest challenge is
using that ocean of numbers to refine their use of algos still further.
What algo/SOR developments should brokers prioritise? Click here to vote in this month's poll.