[ A L G O R I T H M I C
T R A D I N G
which shows the average num-
ber of providers used by firms
regardless of AuM. There has been
a significant year-on-year shift for
hedge funds to move towards using
between one and two providers,
accounting for nearly half of all
hedge fund respondents, whereas
previously these firms said they
were using more than 5 in last
year’s survey. All of this would
suggest that hedge funds used 2018
as a sort of ‘test drive’ period, to
take new algos out for a spin before
deciding on which ones they would
adopt on an ongoing basis.
While hedge funds are clearly
becoming more cannier about
which providers they are using for
algorithmic trading, the figures
for how much of their value is
traded in this manner evidence
that algo popularity is definitely on
an upward curve. Figure 5 shows
that over half (58.15%) of hedge
fund respondents are using algos
to trade more than 50% of their
total value traded, with almost
one-quarter indicating that algos
account for more than 80% of
value traded. Accordingly, there
was a noticeable decline on the
lower end of value traded scale,
indicating that hedge funds are
now increasingly heading towards
a path of greater automation in
search of higher levels of trade
efficiencies.
In terms of the types of algos that
hedge funds are choosing to adopt
and use, Figure 6 shows a spike in
the use of implementation short-
fall (single stock), VWAP and %
volume (participation) algos on a
year-on-year basis, with respective
S U R V E Y ]
Methodology
Hedge fund 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 hedge fund firms or 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.
increases of 11.39%, 11.02% and
14.98% compared to 2018’s results.
There was a smaller increase in the
use of dark liquidity seeking algos
in this year’s survey (up 4.14%),
although this is still well below the
levels seen in the 2017 survey.
In parallel to the results from
long-only buy-side firms, hedge
funds are also rating brokers on a
far higher level than their banking
counterparts, as can be viewed in
the 12 algo provider profiles in-
cluded in this year’s survey. While
banks performed slightly better
according to hedge funds com-
pared to the results from long-only
firms, they were still generally
outperformed in almost every area
by brokers.
The conclusions that can be
“As regulatory focus diminishes, attention
toward securing the best outcomes from algo
trading is once again reasserting itself as the
dominant force for the buy-side.”
84 // TheTrade // Summer 2019
drawn from this year’s algo survey
– incorporating both long-only
firms and hedge funds – is that the
focus has firmly swung back to in-
creased execution efficiencies and
outcomes as the use of algorithmic
trading increases, as the buy-side
also applies increasing scrutiny
on their providers. The question
going forward is who among these
providers, as the industry begins
to eat itself through consolidation,
will be left standing to fulfil the
evolving needs of the market.
The TRADE would like to thank
all of the buy- and sell-side
firms that took part in this
year’s survey. As always, we
encourage as many firms as
possible to take part and to get
their clients involved. In the Q3
edition of The TRADE we will
be publishing the results of this
year’s Execution Management
Systems (EMS) survey.