The turnabout to a more optimistic sentiment – demonstrated by upticks in ratings from buy-side traders – follows on from the downward trends of 2023 highlighted in The TRADE’s Algorithmic Trading Survey 2024.

Ease of use took the top spot when it came to the principal motivation behind why buy-side traders use algorithms, with reducing market impact and consistency of execution following closely behind.

Read more – Beyond the Data: Higher speed and lower latency fastest growing priorities for algo users

Those surveyed also highlighted customer support as a top priority when it came to algo providers. These positive perceptions represent a promising sign for future adoption.

In 2023, only 15% of long-only managers confirmed that their value trades were carried out by algos, however the latest findings show an increase of almost 10% for 2024.

Key contributing factors include the continued technological advancement of the industry facilitating increased access to algorithmic trading. Subsequently, with these more efficient processes, comes increased adoption across the space.

Speaking to The TRADE earlier this year, Chris McConville, global head of execution services and trading at Kepler Cheuvreux Execution Services (KCx), highlighted that despite continued innovation, the intelligent design and execution of algorithms and SORs, are the priorities. 

Read more – Algorithmic trading: Smarter than ever?

Notably, when it came to how traders are actually measuring the performance of their algorithms, the majority confirm that VWAP transaction cost analysis (TCA) is the preferred method (34%), closely followed by implementation shortfall TCA (32%) and liquidity capture (20%).

The findings were based on 2,222 respondents across 35 algo providers with only the evaluations from clients who indicated that they were engaged in managing long-only strategies included. Only verified participants’ responses were included.

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Holistically, 2024 proved to be positive for algorithmic trading providers, with the overall rating for performance sitting at 5.86 – significantly higher than 2023 and demonstrating the highest survey average from hedge fund respondents since we began tracking their results separately in 2016.

Read more – Beyond the Data: Hedge funds loving their algos more than ever before

Looking at the reasons behind hedge funds’ use of algorithms, as in previous years, elements impacting the desk such as ease of use (12%) and increased trader productivity (10.17%) remained high on the list, despite ease of use declining marginally from 12.03% in 2023.

Similarly, areas which impact execution, such as reducing market impact (10.35%), consistency of execution performance (9.89%) and lower latency (8.36%) all featured in the top reasons for using algorithms.

Rounding out the bottom two reasons for using algorithms are data on venue/order routing logic or analysis (3.89%) and results matching pre-trade estimates (2.50%), with the former down from 5.17% in 2023, while the latter increased slightly from 1.23% last year.

The decline in order routing logic or analysis as a key reason for using algorithms could be linked to advancements in market data feeds, which offer more substantial and real-time information from various venues.

This results in a reduction of the need for hedge funds to analyse venue-specific data sets, as they may already receive a consolidated picture of market dynamics.

As mentioned before, higher speed, lower latency was featured as one of the top reasons for using algorithms in The TRADE’s survey. In fact, the category experienced the largest annual shift, increasing by 2.98%.

The uptick can be attributed to increased expectations of algorithmic complexity from hedge funds, as they expect algorithms to ensure trades are able to be executed at optimal prices.

Read more – Beyond the Data: Algo providers successfully address hedge funds’ cost concerns but execution performance is declining

The TRADE received a record number of responses to this year’s Algorithmic Trading Survey. In terms of geographic distribution, hedge fund respondents were based mainly in the UK (41%), Europe (31%) and North America (21%) with a handful of traders located in APAC (6%) and the rest of the world (1%).

Responses for The TRADE’s Execution Management Systems Survey 2024 are currently open. Buy-side users of execution management systems have until 12 July to comment on the services provided by their vendors. Access the survey here.

Current and previous surveys can be accessed here.

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Scores for this area remained flat from the previous year, demonstrating the lowest score (5.62) in the 2023 survey and the only category to fail to increase year on year.

Evidently, the market looked to be in sound agreement and across firms, ease of integration remains a key point of frustration.

The complexity of this process made for the lowest rated service area recorded in the 2023 survey, just behind product development (5.66) – the only two categories not to reach a score of more than 6.00.

Integrating solutions and connectivity to liquidity into the buy-side’s internal eco-systems is a challenge which EMS providers now need to address as a matter of urgency, especially as vendors continue to add ever-more complex features to their offerings, notably AI. 

Read more: The TRADE launches EMS Survey for 2024 

On the other hand, the highest rated areas for respondents were reliability and availability (6.38) and latency (6.20). The TRADE’s EMS Survey 2023 also made clear the demonstrable desire from traders for additional asset class capabilities from EMSs. 

This is particularly true of markets such as fixed income where the modernisation shift is well and truly underway with the industry seeing meaningful evolution towards e-trading workflows. Notably, The TRADE’s survey continues to see increasing numbers of responses from fixed income traders year on year.

A recent Coalition Greenwich report on fixed income trading technology confirmed this trend, highlighting two main contributing factors – the readiness of the asset class and improved attitudes towards electronic trading.

Read more: Increased adoption of EMSs in fixed income expected over the next 12 months despite the pain points associated with new trading technology

In 2022, The TRADE’s EMS Survey scores saw an overall marked decline from 2021, and while the 2023 iteration went some way to repairing the dissatisfaction across the EMS space, the scores only place them even with 2021’s performance. 

In essence, there’s all to play for as providers continue to up their game and avoid falling behind the pack, with integration a potential key differentiator going forward.

The 2023 survey included responses from 332 individuals who highlighted and evaluated 20 providers. The survey profiles buy-side respondents with hands-on experience of trading technology – a mix of traders, portfolio managers and technology personnel. 

Buy-side users of EMS have until 12 July to provide feedback on their vendors for the 2024 edition. To participate please click here.

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In fact, overall, 2024 has proved to be a banner year for algorithmic trading providers, with the overall rating for performance sitting at 5.86 – significantly higher than 2023 and demonstrating the highest survey average from hedge fund respondents since we began tracking their results separately in 2016.

The TRADE received a record number of responses to this year’s Algorithmic Trading Survey. In terms of geographic distribution, hedge fund respondents were based mainly in the UK (41%), Europe (31%) and North America (21%) with a handful of traders located in APAC (6%) and the rest of the world (1%).

Last year, The TRADE’s Algorithmic Trading Survey – Hedge Funds, saw a decline in scores across most key categories, however, this year category averages were up across the majority of functional service areas.

Ease of use (Figure 1) was the highest ranked category in this year’s survey, with a weighted average score of 6.08 out of 7. This was up from 5.89 in 2023 – which declined from 6.00 in 2022.

It is worth noting that survey respondents asserted that ease of use is the largest reason for using algorithms, and has been the main reason consistently in recent years.

High scores for ease of use prove the clear satisfaction among hedge funds utilising algo strategies, cementing the notion that desired developments within the technology are being met.

In second position, in terms of highest ranked categories, is anonymity with an average score of 6.07. This segment saw the largest annual shift, increasing by 38 basis points since last year.

This comes as no surprise as algorithmic trading frequently involves proprietary strategies that are developed with large investments in research and technology. Anonymity can help protect these strategies from being reverse-engineered or replicated by competitors.

Read more – Beyond the Data: Algo providers successfully address hedge funds’ cost concerns but execution performance is declining

On the opposite end of the spectrum, cost and dark pool access – which took the top spot in last year’s survey – were the only two functional service areas to record a decline in score year-on-year; showcasing areas for improvement and key focus areas for providers this year.

Algo monitoring capabilities and execution consulting were the lowest rated categories for 2024, despite both having increased in average score from last year. Algo monitoring capabilities and execution consulting both achieved scores of 5.61, which represented a drop of 30 and 12 basis points, respectively.

Elsewhere, on the asset management side, speaking to The TRADE earlier this year, Kendell James, multi-asset trader at Federated Hermes, labelled broker differentiation as the biggest roadblock when it comes to algo adoption.

“Algos are a great tool for equity execution, however, amongst the standard benchmarks and strategies such as VWAP, implementation shortfall (IS) or percentage of volume (POV), it can be a challenge to select the ‘optimal’ broker algo given the close similarities they all possess. For example, targeting percentage of market volume, a pretty straightforward and achievable strategy, doesn’t normally see much deviation per broker across the normal evaluation metrics,” he said.

Read more – Kendell James: The importance of algo selection in achieving best execution

Responses for The TRADE’s Execution Management Systems Survey 2024 are currently open. Buy-side users of execution management systems have until 12 July to comment on the services provided by their vendors. The survey is accessible here.

Current and previous surveys can be accessed here.

The post Beyond the Data: Hedge funds loving their algos more than ever before appeared first on The TRADE.

With the relationship between hedge funds and algos evolving at a rapid pace, key priorities are shifting. For the first time, The TRADE’s 2023 Algorithmic Trading Survey, Hedge Funds saw ‘consistency of execution performance’ drop out of the top five best rated aspects of algo usage, replaced by ‘cost’.

Execution performance had the largest year-over-year decline in terms of ratings from users of any category, falling 1.60%, while ‘better pricing’ jumped from 7.36% to 8.25%.

As the market continues to juggle increasing regulatory, technological and data-related burdens, costs are mounting, however it appears that arguably one of the more important aspects of providers’ offerings – namely the consistency of execution performance – is falling slightly by the wayside. 

Other factors aside from price improvement which also made the top five of most impactful algorithm features were: dark pool access, increased trader productivity, ease of use, and speed, the latter of which replaced customer support from the fund perspective. 

Read more – Beyond the Data: A tale of two algo strategies

Almost half (43%) of respondents in The TRADE’s survey were based in the UK, while 31% hailed from Europe, 12% from North America (12%), and 15% from the rest of world.

Coalition Greenwich data from earlier this year indicated that in 2023, UK managers traded over a third, 36%, of their order flow by notional value via algorithmic strategies – a number which is expected to grow over the coming years – while high-touch sales trading fell by 3% to 34%.

This is predicted to see a continued downturn in the future. However, while The TRADE’s survey was littered with significant findings, what is also notable is the movement of funds towards multi-asset trading strategies.

The Survey saw new entries from key buy-side respondents which indicated instruments outside of solely equities (though this still made up the majority), namely: fixed income, FX, and ETF’s. 

The TRADE’s 2024 Algorithmic Trading Survey, Hedge Funds results will be unveiled in The TRADE’s Q2 magazine publishing in late June, exploring how things have developed over the last 12 months.

Current and previous surveys can be accessed here.

The post Beyond the Data: Algo providers successfully address hedge funds’ cost concerns but execution performance is declining appeared first on The TRADE.

The buy-side has long voiced simplification and automation as key focus areas within this environment, and taking the top spots this year in terms of what the buy-side most desires when it comes to algorithms were ease of use (5.97) and customer support (6.03).

Antish Manna and Kendell James

With this in mind, there appear to be diverse tactics being employed in order to achieve the best model. The TRADE’s research demonstrated that alongside a general increase in algo usage, there has in some instances been a marked uptick in the actual number of algo providers being used by buy-side traders. However, a notable subsect do appear to be remaining ‘loyal’ to just one.

While almost half (45%) of buy-side traders reported using five or more providers, 29% of traders reportedly only use one provider, demonstrating a notable split between those who display provider loyalty and those of the school of thought that diversification is best.

The number of long-only managers looking to have exposure to five or more providers continues to rise however – increasing since 2023 – indicating a potential for single provider loyalty to fall.

Speaking to The TRADE at the TradeTech Europe conference, Kendell James, multi-asset trader at Federated Hermes, explained that with the need to mitigate risk being a primary consideration for traders, these findings are not very unexpected. 

“Given developments, upgrades and occasional lapses and latency, having ample options helps preserve firm capital and minimises sunk costs in the presence of these issues.”

However, as pertains to variability, he also highlighted that this is somewhat surprising due to the similarity across providers’ algo suits.

Despite this, “every incremental increase in liquidity exposure you can get, counts when trying to achieve best execution,” concluded James.

Read more: Federated Hermes’ Kendell James on optimising algo trading

Interestingly, once The TRADE’s research team applied the veneer of AUM, it became clear that among the larger asset managers, higher numbers of providers were less the case.

Looking specifically at asset managers with AUMs of between $1 and $10bn, a slight decrease from 3.88 in 2023 to 3.04 in 2024 was recorded. Additionally, large, long-only managers, with AUMs of more than $50bn also saw a slight decline. Whereas in 2023, these firms reported using an average of 4.99 providers this dropped to 4.77 this year.

This is the largest decline seen in recent times, likely down to consolidation leading to fewer distinct providers in the market, as well as increased in-house development.

Antish Manna, head of execution analytics, multi-asset, at Man Group, recently sat down with The TRADE to discuss exactly this phenomenon, explaining that his firm does both proprietary algo development and execution analytics in-house for some key reasons. 

“With regard to algo development, firstly we think the information we have on our alphas and strategies gives us an edge when we’re planning the optimal path and approach to execution. Another key factor here is that we can control the pace and focus of development, and finally, being actively involved in the process and deep into the details has improved our team’s DNA and understanding of markets. 

“The same applies for execution analytics – we’re aiming for a best-in-class platform, so every component needs to shine.” 

Elsewhere, The TRADE’s algo survey unpacked exactly which algorithms were favoured by the respondents. Taking the top spot, perhaps unsurprisingly, was VWAP highlighted by 79% of respondents. Closely following VWAP was dark liquidity seeking at 77%. 

Read more: Reliability and access to dark pool liquidity the main priorities for the buy-side when it comes to selecting algo providers

These findings further highlight how client demand has driven innovation in algo trading, leading to more traditional strategies, such as VWAP, to begin incorporating predictive techniques such as machine learning to remain relevant.

Delving into this, Manna explained that when it comes to which metrics his firm uses to monitor algos and broker selection on algo wheels, machine learning – specifically reinforcement learning – indeed comes out on top.

“We think there are multiple benefits to this model: it is a systematic process and devoid of human bias; it offers a statistical framework to balance exploration and exploitation (because panels allocation doesn’t get stale); it’s complementary to experimentation, and finally, it offers a clear incentive for brokers to improve,” he explained.

Current and previous surveys can be accessed here.

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