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The 2010 Algorithmic
Trading Survey
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■ The zc1c Algorithmic Trading Survey
T
his year both the accura-
cy and depth of The
TRADE’s Algorithmic
Trading Survey increased
markedly. There were over
300 buy-side evaluations of
algorithmic performance
with the results showing
that only one in 10 respond-
ents limited themselves to a
single suite of algorithms,
compared with one in six in
2009. With more buy-side
traders using multiple pro-
viders, there was significant-
ly increased scope for indi-
vidual respondents to be
discriminating in their eval-
uation of respective provid-
ers’ algo products.
A total of 26 providers of
algorithmic trading suites
were identified and assessed
by the survey’s buy-side
respondents. It was striking
just how pervasive the use
of algorithms has become,
particularly among large
buy-side firms with over
$50 billion of assets under
management. This group
typically used algorithmic
trading suites from up to
five sell-side providers, one
more than the previous
year. Across all respondents
to the survey, over 45% of
those questioned used five
or more providers of
algorithms.
The main attraction of
algorithms for the buy-
side, both as a means to
increase trader productivi-
ty and reduce market
impact, has remained
remarkably consistent over
the three-year time horizon
Dark liquidity seeking algos
emerge as best of breed
The TkA0E's ¸rd annual algorithmic trading
survey reveals that the market for algorithmic
trading is flourishing, with buy-side traders
displaying an appetite for more sophisticated
algorithms from a broader band of providers.
■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c ;ç
of the survey. It seems that
however sophisticated the
algo offering, the end result
for the trader remains the
same. The one aspect of
service that no longer elic-
its the attention it received
in 2008 is cost, once the
outstanding preoccupation
of respondents (though tell
that to the head trader of a
major long-only firm in
the UK for whom the big-
gest change in algo per-
formance was the increase
in price over the last six
months).
Overall, the survey
found that close to one in
three buy-side traders is
now using algorithms to
trade more than 40% of
equities order flow, up from
one in four a year ago. In
2008, when the survey
began, fewer than one in 10
respondents used algo-
rithms for such a significant
proportion of order flow.
While this gives a clear indi-
cation of the growing
maturity of buy-side traders
as loyal and
discerning consumers of
brokers’ electronic trading
goods, it also hints at a reli-
ance on algorithms to ‘clear
the noise’ during recent
periods of pandemonium
in the market.
5tress-testing a|ges
Market volatility appeared
somewhat of a ‘double-
edged sword’ for algo users
in 2009. While a number of
respondents observed that it
led to greater dependence on
Market review
■ The zc1c Algorithmic Trading Survey
Avera¿e scores
0 1 2 3 4 5 6
0 1 2 3 4 5 6
Internal crossing
Results vs pre-trade estimates
Ease of use
Customisation
Price improvement
Anonymity
Speed
Cost
Execution consistency
Reduce market impact
Improve trader productivity
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7 = Excellent 1 = Very weak
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Other: 12.4%
Speed: 9.4%
Ease of use: 7.5%
Price improvement: 6.0%
Reduced market impact: 14.6%
Execution consistency: 9.0%
Trader productivity: 15.0%
Anonymity: 12.0%
Cost: 14.2%
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One in three buy-
side traders is now
using algorithms to
trade more than 40%
of equities order
flow.
;6 ■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c
Market review
■ The zc1c Algorithmic Trading Survey
Belgium. The market
extremes of the recent past
had revealed algorithms to
be less dynamic than expect-
ed, he observed, as outages
increased. “In general, a lot
of brokers struggle with the
technology,” he remarked.
A head trader at a US
long-only/hedge fund firm
said that algos had become
less consistent over the past
year and required higher lev-
els of manual intervention to
remain effective, especially
for smaller-cap names.
Another US trader at a simi-
lar firm lamented the fact
that while Credit Suisse’s
Guerrilla algorithm was par-
ticularly good for less liquid
names, he was still searching
for something similar from
other providers.
0vertaking vWAP
Three years ago, VWAP was
the outstanding algorithm of
choice for buy-side traders;
easy to understand and sim-
ple to measure, nothing came
close. The algo equivalent of
a workhorse, there was little
love lost, with VWAP algo-
rithms demeaned by survey
respondents as ‘boring and
unimaginative’. But VWAP
has remained a popular
choice, buoyed by its simplic-
ity and fittingly described as
the ‘disco music of the algo
world’ (no one raves about
its subtlety, but it still makes
people get up and dance).
This year’s survey records the
first notable decline in the
use of VWAP among buy-
algorithms, others noted
that the consistency of algo-
rithmic performance
declined as volatility
increased. “There was clearly
less consistency with pre-
trade estimates,” commented
an equity trader at a UK
firm that runs both long-
only and hedge fund busi-
nesses. “Most algos don’t
adapt to volatile markets,”
commented the head trader
at a long-only manager in
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For the third
consecutive year,
implementation
shortfall for single
stocks has risen in
popularity.
■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c ;ç
Market review
■ The zc1c Algorithmic Trading Survey
the relative demise of VWAP
speaks less of its unpopulari-
ty – it still exhibits enduring
appeal – and more of the
growing maturity of buy-side
traders in deploying algo-
rithms as an active part of
their trading strategies. In the
three years since the survey
began, algo usage has evolved
from less sophisticated ‘par-
ticipation’ strategies such as
VWAP and TWAP to more
complex ‘price improvement’
approaches that seek to mini-
mise slippage from a target
price. As a result, for the third
consecutive year, implemen-
tation shortfall (IS) for single
stocks has risen in popularity,
up from 39% in 2008 to 68%
in the latest survey. This
process of natural evolution
was confirmed by one
Australian-based trader who
noted how the firm’s use of
algorithms had shifted from
schedule-based algorithms,
“to more ‘iceberg’ and
‘Sniper-styled’ [an aggressive
tactic that will trade up to the
limit price in a similar fash-
ion to the Credit Suisse algo
of that name] ones to elimi-
nate problems and work to
our adjusted IS benchmark.”
Comfort with algorithms
is increasing, evidenced by
client demands for more
advanced variations on exist-
ing strategies. Responding to
the survey, the head of equity
commenting that unstable
market volumes had made
VWAP redundant for long
periods.
Assessed alongside other
types of algorithm, however,
side respondents, down from
64% to 58%. In part, any dip
in the appeal of VWAP algo-
rithms can be attributed to
market volatility, with one
Hong Kong-based trader
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TWAP
Internal crossing
Implementation shortfall
(basket)
Dark liquidity seeking
Participation
Implementation shortfall
(single stock)
VWAP
% of respondents
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The demand for algorithms that will assist
traders to deal in size was a recurring theme among
respondents.
8c ■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c
Market review
■ The zc1c Algorithmic Trading Survey
eliminate the need for my
traders to split an order in
search of liquidity,” respond-
ed the head trader at a long-
only firm in Ireland. The
search for a ‘super algo’ that
can consolidate dark liquidity
on one deal ticket was ech-
oed elsewhere in the survey.
Based upon the commen-
taries received, the buy-side
trader’s wish list for tomor-
row’s algorithms is extensive
and varied, depending in no
small part on the type of
fund under management.
Some expressed a desire for
‘opportunistic algos’ that let
the user calibrate minimum
and maximum limits and
utilise smart order routing
based on short-term signals
centred on tick data. A good
few highlighted pairs trading
as a major area of growth for
algorithmic development. If
there is one thing in com-
mon however, it is the gener-
al desire of buy-side traders
to take greater control over
an aspect of trading which,
in the three years since the
survey began, has grown to
become a vital component of
their working lives. ■
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Algo selection has also been
driven by necessity as market
fragmentation has made
access to competing pools of
liquidity the overriding con-
cern of traders and sharp-
ened the appetite for ‘smart’
algos. Just how much this
objective underpins trading
is revealed in the survey, with
dark liquidity seeking algo-
rithms used regularly by
more than 81% of respond-
ents, up from 51% a year
ago. Similarly, albeit from a
low base, there has been a
five-fold increase in the use
of algorithms to take advan-
tage of internal crossing
opportunities, up from 5%
in 2009 to 25% in the latest
period of enquiry.
The clear message from
buy-side respondents was for
more of the same. “I want
my algos to get me the best
prices on the most important
available exchanges and cross
up as much flow in dark
pools as possible,” comment-
ed the head trader at a
UK-based long-only manag-
er. “I want one algo that
searches all the dark pools to
trading at a German long-
only firm called on providers
to increase the functionality
of their algorithmic suites to
allow more volume at
favourable prices. The
demand for algorithms that
will assist traders to deal in
size was a recurring theme
among respondents.
As familiarity with the
existing range of algos
increases, buy-side traders
not only want to deploy
more sophisticated strategies,
they also want to be able to
control the strategic parame-
ters of the algorithms they
use. One Singapore-based
head trader, for example,
wanted the capability to set
aggression levels at different
price points. There was an
often-voiced concern among
respondents that broker algo-
rithms were not tuned to the
trading style of buy-side
firms. “Some IS strategies are
too patient on price improve-
ment and too aggressive
when the price is away from
the arrival,” commented the
head trader at one UK long-
only/hedge fund manager.
“The programs are getting
better at reacting to the stock
moving away. However, the
focus seems to be towards
the aggressive side, as
opposed to patience,”
observed the head trader at a
US-based hedge fund.
“I want one algo that searches all the dark pools to
eliminate the need for my traders to split an order in
search of liquidity.”
LIEHXVEHIVEXEPSRKSRP]JMVQ
8roker koll of Ronour
8z ■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c
■The zc1c Algorithmic Trading Survey
-PPYWXVEXMSRM7XSGOTLSXS
Functional capabilities
1he zeze breker keII ef Beneur
*.1307*/(53"%&3
130%6$5*7*5:
30--0')0/063

Bank of America Merrill Lynch
Credit Suisse
Deutsche Bank
0/&4508"5$)
BNP Paribas
Sanford Bernstein
In 2010, buy-side traders cited
improving trader productivity as the
single most important reason for
using algorithms. In an environment
where trading desks are under
expense pressures it should
perhaps not come as a surprise that
getting more trades done with fewer
Survey respondents were asked to provide a rating for each algorithm provider
on a numerical scale from 1.0 (very weak) to 7.0 (excellent), covering 11 functional
criteria. Data taken from over 300 separate evaluations was used to compile the
provider Roll of Honour. In assessing the rankings, the judgements of the various
respondents were weighted according to three components: the value of assets
under management; the proportion of business done using algorithms; and the
number of providers being used. This meant that the most important evaluations
were assigned as much as three times the weight of the least important.
In arriving at the overall Roll of Honour the scores received in respect of each
of the 11 functional capabilities were further weighted according to the
importance attached to each of them by respondents to the survey. The aim is to
ensure that in assessing service provision, the greatest impact results from the
scores received from the most sophisticated and active market participants in
those aspects of service they regard as most important. In addition, there is
close scrutiny of individual responses to ensure that individual assessments that
are very favourable or unfavourable do not distort average scores unduly.
.&"463*/('6/$5*0/"-$"1"#*-*5*&4
1 Roll of Honour recipients are listed in
alphabetical order throughout the survey.
■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c 8¸
8roker koll of Ronour
■ The zc1c Algorithmic Trading Survey
Within the overall framework of
sharply lower available commissions,
intense competition and new
entrants, it might be expected that
the scores on this question would be
different from a year ago. The
shakeout is nonetheless dramatic,
with none of the names listed in the
Roll of Honour and Ones to Watch in
2010 featuring 12 months earlier.
Average scores were down, though
still close to 5.50. Scores among the
brokers receiving the greatest
number of responses were quite
close, but it is clear from scoring and
client comments that some
newcomers are using price as an
important competitive differentiator.
This should be a source of concern
for market participants generally
given the ongoing investment
needed to maintain a credible
presence in the business.
"/0/:.*5:
30--0')0/063
Goldman Sachs
J.P. Morgan
Morgan Stanley
0/&4508"5$)
Barclays Capital
Bloomberg Tradebook
In theory algorithms are nothing if
not anonymous. To reduce market
impact and achieve consistent
results they need to be ‘invisible’ in
the market. In 2009, the average
score of 6.0 across all respondents
suggested a high level of
satisfaction with this criteria across
all providers. The average score in
2010, though still very good, is quite
sharply lower however. Among the
leading providers, scores were quite
algorithmic trading according to
most followers and, as in 2009, was
singled out by buy-side respondents
as the second most important
aspect of service.
Scores achieved across the survey
were largely unchanged, and while
the average was better than 5.0
(which represents general
satisfaction but little more), they
remained perhaps a little
disappointing. However, that may
be a function of client perceptions
of reducing market impact rather
than any failings in the algos
themselves. Interestingly, the
recipients of the Roll of Honour
conclusively outscored the
competition, with the sole exception
of the brokers named as Ones to
Watch in 2010.
$045
30--0')0/063
Goldman Sachs
J.P. Morgan
Morgan Stanley
0/&4508"5$)
Barclays Capital
CA Cheuvreux
In the 2009 survey, cost featured as
the most important reason for using
algorithms. This year it figured in
third place, with close to one-sixth
fewer buy-side traders citing cost as
a reason to use algorithms.
Nevertheless, client comments
suggest that some buy-side traders
are still driven primarily by a simple
desire to lower average commission
rates. However, from a provider
perspective the good news is that
such attitudes seem to be in
decline.
people should be a key objective.
Achieving that while simultaneously
generating consistent execution
results needs to be a key goal,
therefore, for all algo providers.
The good news for providers is
that clients appear satisfied by the
productivity gains they are
achieving. Average scores across all
survey respondents were highest for
this question, averaging more than
5.50. As might be expected, brokers
with a long history of algo provision
scored well, with Credit Suisse
replicating its performance of a year
ago in this category. Deutsche
Bank’s inclusion in the category is
also noteworthy since its history in
this space is shorter than some of
the competition. Among other
providers noted in this category,
BNP Paribas stands out, having
devoted considerable effort to
making its algorithms
straightforward for clients to use,
not least by undertaking custom
work to minimise the need for
traders to constantly ‘fine tune’
algorithms for each transaction. This
was reflected in the sound scores
they received.
3&%6$*/(."3,&5*.1"$5
30--0')0/063
Credit Suisse
ITG
UBS
0/&4508"5$)
ConvergEx
Instinet
The three providers highlighted in
the 2010 Roll of Honour are the
same as last year. Reducing market
impact is one of the key virtues of
8roker koll of Ronour
8µ ■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c
■The zc1c Algorithmic Trading Survey
this is related to improving
productivity by getting trades quickly
into the market. However, it also
reflects perceptions of latency of
trading. Many buy-side traders would
find it hard to quantify latency of
trading but that does not prevent
them having a perception of it. Most
major providers scored at similar
levels in this area, which may reflect
the lack of available measures of
performance. Among the Ones to
Watch however, both Knight and
Bloomberg Tradebook stood out in
terms of the level of scores achieved.
&9&$65*0/$0/4*45&/$:
30--0')0/063
Credit Suisse
ITG
Morgan Stanley
0/&4508"5$)
Knight Capital
Société Générale
Along with productivity gains, for many
buy-side traders consistency of results
is regarded as a critical benefit to be
gained from using algorithms. This
year’s results showed a marginal
improvement from 2009. While in
some respects scores remain
disappointing, this needs to be seen in
the context of a year when some
observers expected that market
volatility would render algorithmic
trading models worthless. It is a
testimony to the overall resilience of
these models that average scores
stood firm, comfortably above 5.0.
However, it is possible that the market
turmoil did claim some victims. Scores
varied widely, with the averages across
major providers ranging from 4.69 to
5.45. In such an environment it says
41&&%
30--0')0/063
Bank of America Merrill Lynch
Credit Suisse
UBS
0/&4508"5$)
Bloomberg Tradebook
Knight Capital
Credit Suisse and UBS proved that
their algorithms are ‘up to speed’ for
the second year running, and were
joined in this category in 2010 by
Bank of America Merrill Lynch. Speed
was mentioned by around 30% of
respondents as among the reasons
for using algorithms. To some extent
close, albeit at generally lower levels
than in 2009. Among Ones to Watch
the scores varied a good deal more,
suggesting that not everyone is
delivering convincingly against this
standard.
Morgan Stanley, which retained a
leading position in this category for
a second consecutive year, has
always maintained that this aspect
of service, while a basic
requirement, should not be taken
for granted. The inclusion of
Goldman Sachs in the Roll of
Honour suggests how dark pools
are operated may be a factor
influencing client perception and J.P.
Morgan does well to be mentioned.
■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c 8ç
8roker koll of Ronour
■ The zc1c Algorithmic Trading Survey
13*$&*.1307&.&/5
30--0')0/063
Deutsche Bank
ITG
UBS
0/&4508"5$)
Instinet
Macquarie
As a reason to use algorithms, price
improvement has declined by more
than one-third year on year. Whether
this means that clients are
unconvinced that algorithms can
actually deliver better results is less
relevant than the impact that may
have on the marketing approaches
taken by providers. Scores did
manage to get above the 5.0 ‘default’
level, but whether this reflects better
perception or lower expectation is not
clear. For some major players it would
seem that clients are genuinely
disappointed, given average scores
well below 5.0. However, of all the
providers, both ITG and UBS were
cited repeatedly in this category,
suggesting that their clients do see
an ongoing opportunity to improve
price performance.
$6450.*4"5*0/
30--0')0/063
Goldman Sachs
ITG
UBS
0/&4508"5$)
Instinet
Knight Capital
Customisation continues to be of
limited attractiveness to clients, but
still offers some genuine source of
differentiation. The Roll of Honour
Lynch returned to the Roll of Honour,
and were joined this year by ITG.
*/5&3/"-$3044*/(
30--0')0/063
Credit Suisse
ITG
UBS
0/&4508"5$)
None
Scores for crossing were slightly
higher in this year’s survey than in
2009. However, the scores recorded
in this category were still among the
lowest posted within the survey. Given
the greater sensitivity to crossing
among clients, this is an area where
some providers may need to do more
work in terms of education and
managing client perceptions. Among
the major providers the weakest score
was 3.84, which should be considered
unsatisfactory by any measure, while
the best score was a very creditable
5.84. This difference in perception has
the capacity to be a genuine source of
competitive differentiation. The strong
showing of UBS in the category says
much about its ability to convey a
message that is comfortable for users.
In terms of Ones to Watch there
were insufficient responses to merit
a ranking this year. In some cases,
the capability may not exist; in
others it has simply not been
evaluated sufficiently by clients to
merit a ranking.
much that Credit Suisse alone
repeated its Roll of Honour ranking of
a year ago. Scores also varied widely
among the Ones to Watch in 2010,
with Knight Capital scoring especially
well. Whether such marked
differentiation can be turned into
significant business gains will only
become apparent in next year’s survey.
&"4&0'64&
30--0')0/063
Bank of America Merrill Lynch
ITG
UBS
0/&4508"5$)
CA Cheuvreux
Nomura
As clients make use of more
algorithmic suites and generally
become more comfortable with
algorithmic trading tools, it would be
logical for them to be less concerned
about ease of use. Moreover, if gains
are to be made in terms of trader
productivity it follows that algos must
be easy to use and, to that extent,
comparing providers allows buy-side
traders to see what really is easy and
what constitutes difficult.
Encouragingly, in this functional
category overall scores remain very
high, albeit slightly lower than in 2009.
It is also noteworthy that the number
of responses citing ease of use grew
quite sharply year on year. In 2010,
both UBS and Bank of America Merrill
86 ■ TRE TkA0E ■ ISSuE z¸ ■ |Ah-MAk zc1c
8roker koll of Ronour
■The zc1c Algorithmic Trading Survey
names, including ITG, which
featured last year, clearly do satisfy
clients based on generally solid
scoring. Other brokers, however,
achieved average scores of below
5.0. This may reflect a lack of
capability or simply disinterest on
behalf of their clients. Among Ones
to Watch in 2010, both Knight
Capital and Instinet scored
extremely well. Whether this can be
transferred into significant new
business remains to be seen, but
certainly some brokers believe this
is still a valuable avenue to pursue.
$0/4*45&/$:8*5)
13&53"%&&45*."5&4
30--0')0/063
Goldman Sachs
ITG
UBS
0/&4508"5$)
Knight Capital
Nomura
Given the clear desire for predictability
of results, it is perhaps surprising that
so few clients view consistency with
pre-trade estimates as a factor in
selecting algorithmic trading suites.
Since the average scores achieved
were the lowest in the survey, it would
seem that clients have simply given
up on pre-trade estimates and
assume that actual results bear no
correlation to them. The Roll of
Honour names however, did score
materially better than others, so for
them at least an element of client
belief in the data remains intact. It is
also worth noting that Nomura, which
focuses a good deal on pre-trade
analysis, also scored well among the
Ones to Watch.
Overall performance
As well as considering the functional capabilities of algorithm providers, the
survey also assessed overall performance as measured across all capabilities,
among five different groups of respondents. This analysis took account of both
un-weighted and weighted scores based on the different levels of importance
attached to the various aspects of service covered in the survey.
.&"463*/(07&3"--1&3'03."/$&
"4*"/$-*&/54
30--0')0/063
Citi
Credit Suisse
UBS
0/&4508"5$)
ITG
Macquarie
In 2009, responses to the survey
from Asian clients were too few to
categorise providers. This year the
number of responses has increased
and for a few brokers at least they
are sufficient to make a realistic
assessment. It is interesting to note
the strong showing of Citi among
this client group, while the
accompanying Roll of Honour
recipients are not surprising.
Average scores among Asian clients
were generally satisfactory but
weaker than those seen in other
regions. In part that may reflect the
nature of the markets involved as
well as the fact that usage of
algorithms among Asian managers
remains less well developed,
though growing. It is also worth
noting that Macquarie, one of the
few indigenous Asian providers,
received a number of strong scores.
&6301&"/$-*&/54
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Credit Suisse
Deutsche Bank
Morgan Stanley
0/&4508"5$)
Barclays Capital
CA Cheuvreux
After the UK, continental European
respondents were more numerous
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-&"%*/($-*&/54
30--0')0/063
Bank of America Merrill Lynch
ITG
UBS
0/&4508"5$)
Instinet
J.P. Morgan
The weighting of leading clients is not
based on size of assets alone, though
that is one component. The others
are the extent to which clients use
algorithms within their business (i.e.
the proportion of trading done using
algos) and the number of providers
they actually use. This makes them
arguably the most knowledgeable
and experienced respondents, with
the greatest ability to compare and
contrast the different service
providers. ITG was among the Ones to
Watch in 2009. Based on the latest
findings, increased market
penetration among respondents has
led to ITG being included in the Roll
of Honour for the first time. In what
should be recognised as a very
creditable achievement, both Bank of
America Merrill Lynch and UBS once
again feature in the Roll of Honour
among the group of leading clients.
Ones to watch in 2010 are J.P. Morgan
and Instinet, having beaten off strong
competition from Bloomberg
Tradebook in this category. ■
of Honour, while Bank of America
Merrill Lynch also maintains its
standing and reputation among UK
clients despite the ownership
changes it has undergone.
64$-*&/54
30--0')0/063
Bank of America Merrill Lynch
Credit Suisse
Goldman Sachs
0/&4508"5$)
Instinet
Pragma
As well as being the most
experienced users of algorithms, US
clients are also the most satisfied
with the performance of providers
based on the scores awarded. Bank
of America Merrill Lynch retains its
Roll of Honour ranking from 2009,
but is joined this year by Goldman
Sachs and Credit Suisse, with
Morgan Stanley scoring less well
this year. It is interesting to note
that trader productivity scored very
highly among this respondent
group, suggesting that as clients
gain in maturity and confidence
using algorithms the real ‘pay-off’
can begin to be appreciated.
Among the Ones to Watch in 2010
both Pragma and Instinet achieved
extremely high scores, albeit from a
smaller reference group.
than those of any other region.
Scores were higher than those seen
in Asia, but still behind the UK and
North America. The main providers
are seen as being North American
in origin, even when they are Swiss.
With the exception of Deutsche
Bank, the survey found that
indigenous European banks have
yet to make significant inroads,
based upon the number of
responses received. As in Asia,
indigenous providers do appear to
be well regarded, however, as the
scores for Barclays and, especially,
CA Cheuvreux attest. But however
well regarded they may be among
their clients they are not yet among
the leaders in terms of overall
responses received.
6,$-*&/54
30--0')0/063
Bank of America Merrill Lynch
Instinet
UBS
0/&4508"5$)
Bloomberg Tradebook
J.P. Morgan
UK clients comprise the largest
group of respondents in the survey.
They have also been exposed to
algorithmic trading more than any
other group outside of North
America. Scores are generally strong
and above average, which suggests
that familiarity breeds a measure of
comfort and satisfaction. The
inclusion of Instinet in the Roll of
Honour represents the fact that the
overall survey responses they
received tended to be concentrated
in the UK and were generally good.
UBS retains its position in the Roll
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A
s 2009 loomed on the
horizon, buy-side trad-
ers could have been forgiv-
en for leaving algorithms
on the sidelines for fear that
they would not be able to
cope with the unprecedent-
ed levels of intra-day vola-
tility unleashed by
Lehman’s collapse.
And many did just that,
for a while at least. But a
dearth of liquidity and cap-
ital in early 2009 meant that
a large number of buy-side
traders had little choice but
to work with the tools they
had to exercise greater con-
trol over their executions.
In the US, TABB Group’s
Institutional Equity Trading
2009/2010 report noted that
the surge in trading vol-
umes in Q4 2008 had
forced traders into trusting
algorithms more extensively
to handle the sheer volume
of trades as positions were
unwound furiously. The
percentage of US institu-
tional order flow directed
via broker algorithms
increased to 31% in 2009
from 24% 2008 and TABB
predicts it will rise higher,
to 36%, in 2010.
The importance of algo-
rithms in times of high vol-
umes is echoed in The
TRADE’s 2010 Algorithmic
Trading Survey. Trader pro-
ductivity was the most fre-
quently cited reason for using
execution algorithms in 2009
by survey respondents.
4VJUZPVSTFMG
“Trader productivity was a
big focus for our algorith-
mic clients during 2009. We
Faced with high volatility and low volumes
during zccç, buy-side traders demanded more
from their execution algorithms. Leading sell-
side providers explain how they responded.
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have enabled our clients to
leverage our quantitative
skill set and unique liquidi-
ty to provide them with
simplified, comprehensive
trading solutions to make
their execution process
more efficient,” comments
Michael Seigne, head of
European algorithmic trad-
ing, Goldman Sachs.
Though ranked less
highly than trader produc-
tivity by survey respond-
ents, ease of use was also a
common theme for
Goldman Sachs’ clients. “If
a client, for example,
always wants to split a por-
tion of their order to inter-
act with non-displayed
liquidity in a certain way
we will work with them to
reduce the number of
parameters they need to
think about before sending
us an order,” he adds.
According to Yvonne
Hansmann, head of execu-
tion sales, EMEA at Bank of
America Merrill Lynch, cus-
tomisation was an increas-
ingly important differentia-
tor for clients last year. She
observes that more clients
were working individually
with their sell-side
counterparts to create their
own specific strategies from
scratch.
“Clients no longer want
a simple off-the-shelf prod-
uct,” says Hansmann. “They
want customised strategies
tailored to suit their trading
style and this is undoubted-
ly where they receive the
greatest benefits from algo-
rithmic trading.”
While some ask for rela-
tively simple tweaks, like
choosing which liquidity
venues they connect to,
Hansmann says many more
are starting with a blank
sheet of paper and working
with their brokers to deter-
mine the best algo strategy
to suit their desired
benchmarks.
(PXJUIUIFGMPX
Volatility levels fell in early-
to-mid 2009 but volumes
were slow to pick up. Buy-
side traders adjusted the
strategies they used accord-
ingly, says Rob Boardman,
head of electronic trading,
Europe, at agency broker
ITG, noting the sharp rise
in the use of liquidity-seek-
ing algorithms from 12
months previously. The

"Trader productivity was a big focus for our
algorithmic clients during zccç."
1MGLEIP7IMKRILIEHSJ)YVSTIEREPKSVMXLQMGXVEHMRK+SPHQER7EGLW
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“We continue to focus
on adapting our crossing
process and liquidity strate-
gy, including our non-dis-
played pool, SIGMA, to
help our clients re-aggre-
gate liquidity. The quality of
the liquidity continues to be
paramount in determining
which destinations we con-
nect to,” says Seigne.
“Augmenting liquidity in
this way continues to help
our clients’ execution
quality.”
4QPJMUGPSDIPJDF
Customisation and a greater
awareness of when to
employ specific algorithmic
strategies are signs that
buy-side firms are becom-
ing increasingly attuned to
the electronic trading envi-
ronment and able to make a
better critical judgement of
the tools offered to them.
With so many algorith-
mic providers in the market
– 26 were reviewed by
respondents to The
TRADE’s 2010 Algorithmic
Trading Survey – buy-trad-
ers are not short of choice.
This wealth of alterna-
tives was highlighted in the
number of individual sup-
pliers of algorithms used by
the buy-side traders that
participated in the survey. A
total of 45.7% of respond-
ents used five or more
providers last year, com-
pared to 40.5% in 2008.
However, Owain Self,
head of algorithmic trading
for EMEA and the Americas
at UBS, believes that now
large sell-side firms have
started to rebuild, buy-side
traders will start to consoli-
date their algorithmic
providers.
“During the turmoil,
traders were looking to
diversify the relationships
they had in the algorithmic

"Algorithms have
improved in reliability,
speed and performance."
6SF&SEVHQERLIEHSJIPIGXVSRMGXVEHMRK)YVSTI-8+
TRADE’s 2010 Algorithmic
Trading Survey found that
internal crossing algorithms
were used by 25% of
respondents compared to
5% the previous year, while
82% used dark liquidity-
seeking strategies compared
to 51% in the 2009 survey.
“The change in market
conditions over the year
was dramatic,” observes
Boardman. “Market volatili-
ty was at once-in-a-genera-
tion highs at the start of
2009, but we are now
almost back to pre-crisis
volatility levels and signifi-
cantly reduced trading vol-
umes, which favours liquid-
ity-seeking strategies rather
than playing it safe with
VWAP strategies.”
Seigne at Goldman Sachs
notes that the increase in
the number of non-dis-
played trading venues and a
greater focus on dark
liquidity aggregation and
connectivity in 2009 also
drove the use of these types
of algorithms. Chi-X
Europe’s Chi Delta, BATS
Europe’s dark pool and
SmartPool, the non-dis-
played trading venue oper-
ated by NYSE Euronext, are
just three examples of dark
pools owned by trading
venues that launched and
gained significant volume
in 2009.
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“I wouldn’t say there is
too much choice,” says
Hansmann, “but head
traders need to consider
more carefully how they
are going to evaluate the
strategies they use. Quite a
few clients now ask us to
fill out questionnaires so
they can assess the
attributes of specific pro-
viders more effectively.
Detailed evaluation of the
performance of the strate-
gies they utilise is where
execution consulting and
transaction cost analysis
capabilities add real value
for the client.”
When rating algorithm
performance, however,
there were only small
changes to the rankings of
service in the 2010 survey
compared to 12 months
previous. Declines in client
satisfaction were most evi-
dent in anonymity and cost,
while buy-side traders
seemed marginally happier
with price improvement
and customisation.
Boardman asserts that
the increased expectations
of traders coupled with an
improvement in the overall
performance of algorithms
across the industry were
two hidden effects within
the ratings on service that
effectively cancelled each
other out.
space and experiment with
new providers, but I think
this will contract over
time,” says Self. “While
some boutique algorithmic
providers may deliver a
very specialised offering, a
lot of clients will be
putting pressure on their
bigger brokers to fill any
product gaps.”
Self argues that this kind
of approach will work out
to be more cost effective for
clients of bulge-bracket
firms that pay for algo-
rithms as part of their
overall broker relationship.
“In most cases, we can also
offer a greater level of cus-
tomisation, connectivity to
a wider range of liquidity
venues and a better cus-
tomer service and support
than smaller, niche provid-
ers,” he adds.
1JDLBOEDIPPTF
Hansmann at Bank of
America Merrill Lynch
believes a greater choice of
algo providers is an advan-
tage. She observes that buy-
side traders do not typically
use all algorithms included
in a single provider’s suite,
instead opting for one strat-
egy for a VWAP trade on
Deutsche Börse and another
for a VWAP trade on the
London Stock Exchange, for
example.

"Clients no longer want
an off-the-shelf product."
=ZSRRI,ERWQERRLIEHSJI\IGYXMSRWEPIW)1)%
&EROSJ%QIVMGE1IVVMPP0]RGL
“Algorithms have
improved in reliability,
speed and performance,”
says Boardman. “Among our
client base, price improve-
ment was not always con-
sidered as important as con-
sistency of performance, as
clients that have many
trades to complete want a
dependable outcome.
Traders are now more adept
at asking the right questions
to get the algorithmic per-
formance they expect.” ■

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