Algorithmic Trading Survey] Thetrade Daily Newsletter

[ALGORITHMIC TRADING SURVEY] THETRADE DAILY NEWSLETTER THE Subscribe 2020 ALGORITHMIC to alerts TRADING for the latest news delivered With special analysis from to your inbox everyday Aite Group SURVEY subscribe online at LONG-ONLY www.thetradenews.com Issue 63 // thetradenews.com // 75 [ALGORITHMIC TRADING SURVEY] Brokers bolster algo access to dark pools and liquidity for buy-side The long-only results of The TRADE’s 2020 Algorithmic Trading Survey show that dark pool access remains a key focus for asset managers, as providers see largest jump in score in connecting the buy-side to dark liquidity. n the whole, 2019 was a very 2020, the most impactful features of pants’ algo use. The largest jump in good year for global equity algorithms are customer support and score is linked to this capability (5.90 markets. Passive investing services, ease of use, dark pool access, in 2020 versus 5.74 a year ago). Bro- Oand indexing continued to tick along execution consistency, and increased kers continue to offer a greater range while the major US indices recorded trader productivity (Figure 1). Sup- of connectivity and provide access to new highs—the year ended with three port services, which draw the highest liquidity as the number of dark pools rate cuts in the US helping to fuel the score of 5.96, also attracted relatively and amount of dark liquidity continue largest gains since 2013. Likewise, high marks in 2019’s survey (5.95). to increase. Algos are being used European markets had their best Being able to get ahold of a broker more effectively to manage greater year in a decade. Many of the fears supporting the algo suite is a top amounts of fragmented liquidity, and worrying investors never realised— priority for the buy-side. Ease of use, market participants are increasingly the global recession never arrived, a category that has been improving satisfied with the results. Execution trade wars didn’t deter investment, over the past three years, garners the consistency marks the second-highest Brexit didn’t implode the market, and second-highest mark of 5.92 (versus jump in year-over-year scoring (5.81 World War III wasn’t on the horizon 5.89 in 2019) as technology becomes in 2020 versus 5.75 in 2019), likely a after all. Taken together, a robust more user-friendly and streamlined, consequence of calmer seas (e.g., the market, stringent best execution such as the automation of trades en- Cboe VIX averaged 15.39 vols in 2019 requirements, and improved decision gaging algos that originated in order/ compared to 16.64 in 2018) coupled support created a favorable environ- execution management systems. with improved decision support. ment for algorithms. Lastly, increased trader productivity The average score of long-only Dark pools continue to make receives a score of 5.80, down from survey respondents is 5.71 in 2020—a their mark 5.88 in 2019. While there is no doubt slight decrease from the 2019’s score Dark pool access continues to be an algos improve front-office productiv- of 5.74 (up from 5.60 in 2018). In important area for market partici- ity, at a point, diminishing returns to 76 // TheTRADE // Spring 2020 [ALGORITHMIC TRADING SURVEY] ALGO 2018 Figure 1: Rating of algo performance ALGO 2019 ALGO 2020 Aspect of service Weighted average score 5.66 Execution consulting/pre-trade cost estimation 5.57 5.43 5.32 Customisation features 5.50 5.51 5.58 Price improvement 5.59 5.53 Algo monitoring capabilities 5.58 5.55 Data on venue/order routing logic or analysis 5.62 5.68 Reduced market impact 5.62 5.80 5.70 Flexibility/ sophistication of SOR 5.67 5.70 5.72 Anonymity 5.75 5.85 5.72 Cost 5.48 5.71 5.73 Speed 5.56 5.87 5.76 Increase trader productivity 5.59 5.88 5.80 Execution consistency 5.57 5.75 5.81 Breadth of dark or alternative 5.67 liquidity sources that are accessed 5.74 5.90 5.75 Ease of use 5.89 5.92 5.76 Customer support and services 5.95 5.96 5.00 5.10 5.20 5.30 5.40 5.50 5.60 5.70 5.80 5.90 6.00 Issue 63 // thetradenews.com // 77 [ALGORITHMIC TRADING SURVEY] production are likely. Figure 2: Reasons for using algos (% of respondents) Feature 2020 2019 2018 Simple and fast still matters Ease-of-use 11.08 10.98 14.57 Respondents’ reasons for using algos, presented in Figure 2 as a percentage Consistency of execution performance 10.51 11.25 13.69 of responses, differ between 2020 and Increase trader productivity 10.45 10.05 11.29 2019. Overall, increases are seen in six Reduce market impact 10.29 10.98 11.93 areas of algo trading this year versus last: ease of use, increased trader pro- Greater anonymity 9.93 7.64 9.18 ductivity, greater anonymity, smart Flexibility and sophistication of smart order routing 8.02 7.59 n/a order routing, routing logic, and pre- Algo monitoring capabilities 7.20 7.64 n/a trade estimates. Meanwhile, decreases are observed in seven categories Lower commission rates 6.83 8.28 7.98 over the same period: consistency of Better prices (price improvement) 6.65 7.13 7.78 execution performance, the reduction Higher speed lower latency 6.56 6.81 7.90 of market impact, algo monitoring, lower commission rates, better prices, Customisation capabilities 5.74 6.39 7.74 higher speed, and customisation. Data on venue/order routing logic or analysis 5.07 4.14 n/a Thus, net/net, there is a greater focus Results match pre-trade estimates 1.67 1.12 3.27 on working orders quickly, easily, and in a sophisticated manner that protects information leakage. There is less emphasis being placed on number of algo providers, falling to services. (implicitly/explicitly) cheaper algos, 1.83 in 2020 from 2.20 in 2019, on av- Larger managers are generally more those that are faster than others, or erage. No doubt, cost pressures have likely to be motivated to use several those that can be highly customised kept them from opening up the purse algo providers, given the resourc- to provide a consistent and superior strings to engage with additional es they are able to put to work as outcome. providers. Likewise, larger managers well as the requirements necessary with over US$50 billion in AUM have for managing a multi-asset class "One and done" may be a relic also scaled back and consolidated portfolio. Looking beyond equity of the past their relationships to an average of algorithms, the rise of algo use in the Across the board, it is evident that 4.02 providers this year from 4.45 in foreign exchange (FX) asset class has long-only funds of varying assets un- 2019. While having four providers grown over the years for spot trading der management (AUM) are mostly still appears to be a well-diversified and, recently, has begun to extend looking to at least two algo providers strategy, adding more (e.g., equity to FX derivatives such as non-deliv- (Figure 3). From a diversification algo providers) may have diminishing erable forwards. New regulations, and business-continuity perspective, returns in light of limited commission such as the uncleared margin rules, managers are likely unwilling to place budgets to pay for research and other are driving FX derivatives into the all of their eggs in one basket and risk a provider outage. The smallest firms, including those managing up to US$1 Figure 3: Average number of providers used by AUM (USD billions) billion, appear to be comfortable Feature 2020 2019 2018 with using roughly two providers. Not answered 3.42 2.33 2.87 Larger firms, such as those with an AUM range of US$1 billion to US$10 Up to 0.25 2.14 2.13 2.50 billion, likely rely on three. The largest 0.25-0.5 1.83 2.20 2.17 firms with AUM over US$10 billion 0.5-1 2.00 1.43 2.50 work with about four algo providers. Digging into the details a bit, 1 to 10 3.33 2.90 3.64 long-only managers with US$0.25 10 to 50 4.25 3.73 4.26 billion to US$0.5 billion in AUM More than 50 4.02 4.45 4.41 show a year-over-year decrease in the 78 // TheTRADE // Spring 2020 [ALGORITHMIC TRADING SURVEY] Figure 4: Number of providers used (% of responses) 14.89 14.36 12.68 28.20 15.67 14.89 17.95 39.55 41.13 2020 2019 2018 9.22 10.26 13.43 19.86 29.23 18.66 Provider count 1 2 3 4 5+ clearinghouse and fostering more into this group. This year, a whopping to 12.75% from 7.06% a year ago—the electronic trading. The development 41.13% of surveyed firms have a large second-largest increase of any bracket. of new algos is a natural extension group of providers they work with. At the lower end of the spectrum, of this phenomenon. Thus, it may be The reason for this is two-fold. On one 8.43% of participants trade 5% to that these managers are holding the hand, a combination of business rela- 10% of their portfolio’s value using an number of algo providers somewhat tionships and specialised tech (offering algorithm (versus 4.76% 12 months consistent while diversifying the better features and functionality that ago).

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