The TRADE 68 - Q2 2021 | Page 66

[ A L G O R I T H M I C T R A D I N G S U R V E Y ]

the highest year-on-year score increase in this year ’ s survey , up 25 basis points to 5.98 . This jump shows the growing role that algos play in boosting the performance of traders and indicates the industry is becoming more comfortable with and proficient in its use of algorithms . “ Algo monitoring capability ” marks the second-highest jump in score , having boosted its score from 5.5 to 5.7 . “ Dark pool access ” recorded an increase of 0.11 and remains among the top-rated categories despite the push from European regulators to shift trading onto lit venues .

Algo providers have done well in providing usable and efficient solutions . However , there is still progress to be made when it comes to other algo characteristics . While the average score and most individual scores in 2021 were up from 2020 , some categories recorded a slight decrease . “ Execution consistency ” received a lower score of 5.76 in 2021 , down 0.10 from 5.86 in 2020 . “ Price improvement ” also experienced a decrease of 0.09 to arrive at 5.55 and emerged as the lowest scored category . “ Execution consulting and pre-trade cost estimation ” and “ customisation ” are among the lowest scores , with 5.60 and 5.67 , respectively , reflecting concerns from hedge funds about how well the sell-side is able to provide feedback on the performance of algos .

While progress has not been consistent across all areas from all algo providers , the range of the average scores tightened from a minimum of 5.55 to a maximum of 6.06 . This indicates that the industry is beginning to refocus on the quality of execution and achieving better outcomes for

the end investor , even though room for improvement remains . Initial concerns brought by the revised Markets in Financial Instruments Directive ( MiFID II ) have evolved from managing the compliance requirements , particularly around best execution , to fine-tuning algorithmic trading strategies as a major component of e-trading usage .

Survey participants indicated that their reasons for using algorithms are primarily associated with “ ease of use ” ( 11.21 %) and “ reduction of market impact ” ( 10.78 %), followed by “ increase of trader productivity ” ( 10.29 %), as shown in Figure 2 . The fact that “ ease of use ” continues to place among the top reasons for using algos year after year emphasises the value that buy-side firms place on simplicity and reliability . Between 2020 and 2021 , the top two reasons for using algorithms are increasingly motivating factors while some categories have switched places in their importance : “ consistency of execution performance ” has dropped from the top three to fifth place at 8.68 % and “ lower

66 // TheTRADE // Summer 2021