The TRADE 2019 Algo Survey - Hedge Fund | Page 8

[ 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.