[ A L G O R I T H M I C T R A D I N G S U R V E Y ]
Figure 4 : Number of providers used (% of responses )
ALGO 2021 ALGO 2020
> 5
41.04 46.03
3-4
23.13 30.16
1-2 23.81
35.82
0
10 20 30 40 50
commission rates ” moved up two spots at 9.27 %.
“ Flexibility and sophistication of smart order routing ” and “ customisation of capabilities ” are increasingly important drivers when it comes to more algo usage . This is especially true as usage has become more harmonious across the industry . The buy-side is getting more sophisticated and requires more fine-tuning to meet very specific trading needs , such as customised closing auction strategies and enhanced liquidity-seeking options , particularly with strategy that looks to the rising retail flow .
The 2021 survey reveals an intriguing trend in the number of providers that hedge funds are selecting . Historically , hedge funds have shown a clear preference to use multiple algo providers . Figure 3 demonstrates that funds both big and small in terms of assets under management ( AUM ) have often reported using an average of two or more different algo providers . However , the survey results indicate that only the hedge funds managing less than US $ 500 million and funds with US $ 1 billion to US $ 10 billion have reported an increase in their average number of providers from 2020 to 2021 . Hedge funds managing over US $ 10 billion reported a decline in the average number of providers used .
The 2021 data shows that , on average , hedge funds have cut back on the number of algo providers they engage with , yet larger managers are still associated with a higher number of providers than smaller managers . This is still down to the requirements associated with managing a larger multiasset class portfolio . Looking beyond equity algorithms , the rise of algo use in the foreign exchange ( FX ) asset class has grown over the years for spot trading and , recently , has begun to extend to FX derivatives such as non-deliverable forwards . As algo providers strive to provide comprehensive multi-asset solutions , hedge funds start to rely on certain types of providers more than ever . The relationship just got stickier .
Figure 4 further shows a clear trend that hedge funds are using fewer providers . Over 35 % of the responses reported using one or two providers , a large increase from 23.8 % in 2020 . Additionally , the percentage of funds using five or more providers decreased from 46 % in 2020 to 41 % in 2021 , and the percentage dropped from 30 % to 23 % for the those using three or four . Nonetheless , the largest group of the responses still reported using more than five providers , as the benefits of using a variety of algo providers still prevail — until next year ’ s survey . It will be interesting to see if further consolidation happens and more buy-side firms use only one or two providers .
In terms of the distribution of how much value of portfolio traded , the survey finds that over half ( 53 %) of respondents are using algos to trade the majority of their total value traded ; this was also the case in 2020 ( Figure 5 ). Moreover , the proportion of hedge funds using algos to trade more than 80 % of value traded has risen from around 10 % in 2020 to 20 % in 2021 . A comparable decline in the proportion of funds trading 60 % to 70 % of their value using algos has occurred ; falling from 21 % to less than 13 %. The proportion of funds using algos to trade 40 % to 60 % of value traded also declined , which offset the increase in the funds using algos to trade more than 70 % of value traded . These findings suggest that hedge funds are increasingly relying on algorithms to trade the
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