[ A L G O R I T H M I C
T R A D I N G
long-only funds turned to dark liquid-
ity-seeking algos (72.94%)—a trend
that has been increasing in recent years
and highlights an evolution in trading
performance. Algos that have been in
existence for years, including volume
weighted average price (VWAP), time
weighted average price (TWAP), and
implementation shortfall (IS), may be
gamed and thus might not offer much
benefit in terms of improving trading
performance. However, navigating all
of the execution venues and using dark
liquidity-seeking tools, along with cus-
tomised smart order routing, may offer
significant advantages and outperform
alternative options.
Over half of surveyed partici-
pants indicate they use VWAP algos
(54.71%), a figure that has mildly
declined over the past few years.
Nearly as many managers also employ
implementation shortfall for single
stock algos (53.14%)—a percentage
that has ticked higher as of late and is
likely the result of providers emphasis-
ing greater variation in their offerings.
Lastly, although the percentage-of-par-
ticipation algos are used by nearly half
of the respondents (49.02%), there has
been a decline in usage year-over-year
as preferences shift.
S U R V E Y ]
Figure 5: Algo usage by value trader (% of responses)
Feature
2019
2018
1.96 5.09 4.27
0-5% 4.71 6.08 5.69
5-10% 8.43 4.76 5.28
10-20% 6.08 11.17 9.56
20-30% 7.65 5.25 11.18
30-40% 9.22 9.69 12.19
40-50% 12.75 7.06 14.02
50-60% 22.16 9.85 8.13
60-70% 9.61 14.61 9.76
70-80%
80% and over
6.47 10.18 9.76
10.98 16.26 10.16
Figure 6: Types of algos used (% of responses)
Feature
2020
2019
2018
% Volume (participation) 49.02 60.92 59.55
Dark liquidity seeking 72.94 59.11 54.27
Implementation shortfall (basket) 13.92 16.42 14.43
Implementation shortfall (single stock) 53.14 45.32 35.98
Other 5.10 3.45 6.30
Target close/auction algos 0.00 0.33 0.00
TWAP 24.71 21.51 28.46
VWAP 54.71 63.87 55.69
Methodology
Long-only 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 dozens of evaluations,
yielding thousands of data points for analysis. Only the
evaluations from clients who indicated that they were
engaged in managing long-only firms have been used to
compile the provider profiles and overall market review
information.
Each evaluation was weighted according to three
80 // TheTRADE // Spring 2020
2020
Not Answered
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 approach
both informative and useful as they assess different
capabilities in the future. Lastly, this year’s survey analysis
for the long-only results were carried out by Aite Group.