The TRADE 2018 Algo Survey - Long Only | Page 8

[ A L G O R I T H M I C T R A D I N G S U R V E Y ]
expected to continue into 2018 following the implementation of MiFID II was the consolidation of brokers and algo providers by the buy-side , and in turn the reduction of technology complexity and cost . Instead it seems the opposite is true and Figure 3 shows as much ; the adoption of multiple algo providers has increased almost across the board , with only those on the smaller end – those managing between $ 0.25 and $ 0.5 billion – reducing the number of algos they use , albeit by a small margin .
From the very small ( with up to $ 0.25 billion in AuM ) to the larger players ( more than $ 50 billion in AuM ), long-only firms have been taking on more algo providers over the past year , even though most are still hovering around the two to three provider mark , possibly with an eye on the new requirements for best execution that have come into play . By increasing the level of access to algorithmic trading route options , firms will be better positioned to provide evidence of best execution practises , which would be limited by sticking to just one or two algo providers .
Even so , around one-third of long-only respondents to this year ’ s survey are sticking with either one or two algo providers , according to Figure 4 . This is consistent with the results from last year ’ s survey , although there was a 5 % year-on-year decrease in firms using three to four algo providers , while the proportion of firms with more than five providers increased by the same amount . It would be surprising to see all but the largest buy-side firms continuing to use more than five algo providers as the effects of MiFID II bed in properly . Brokers will continue to assess where they are generating revenues from their buy-side clients , but in the new trading environment , the balance of power seems to reside with the asset managers .
Increasing popularity As algos become easier to use and advancements in technology march onwards , buy-side trading desks are becoming increasingly comfortable in letting algos do the work while human traders are able to focus on the finer details , although this will be an area of keen interest to regulators . As such , it ’ s little surprise to see the proportion of trades conducted by algo increasing in the 2018 survey . The number of firms trading less than 30 % of their value through algos dropped significantly year-on-year , with just under onethird of long-only firms fitting into this category , down from almost half of respondents last year .
The most significant change occurred with firms trading between 30-50 % of their value with algos , which jumped from 12.57 % in 2017 to 26.21 % in this year ’ s survey , suggesting that firms that had previously shunned algo trading are coming around to the benefits that automated trading can offer . There were marginal increases for number of algos used for 50-70 % of value traded , but a more noticeable spike in the 70-80 % range , where proponents of algo trading are investing further in electronic trading methods .
In terms of the types of algos that long-only firms are choosing to use , Figure 6 shows a distinct shift away from dark liquidity seeking , which has fallen dramatically since 2016 , when 81.9 % of respondents were using these types of algos to just 54.27 % this year . Whether this is in direct correlation to the introduction of the DVCs under MiFID II remains to be seen but gains for the TWAP and implementation shortfall ( basket ) -type algos this year indicate that long-only firms are now choosing to move away from automated dark trading . One of the most historically popular types of algorithm , participation-based algos , saw consistent usage and the same is true for VWAP-type algos .
It seems then that even in the early days of MiFID II , certain trends are already emerging . Greater regulatory oversight has forced the buy-side ’ s hand into learning far more about the algos they use
80 // TheTrade // Spring 2018