Algorithmic trading has become a standard practice within the securities industry according to a recent survey conducted by Financial Insights, an IDC company, and sponsored by Bank of America. They survey shows that 72 percent of investment managers use algorithms, up from 67 percent in 2005.
Among hedge funds 93 percent of respondents reported experience with algorithms. While these figures suggest the market has reached maturity, there remains significant growth potential as trading technologies become personalised and more sophisticated. 63 percent of participants has increased their usage of algorithms in 2006.
The survey, “Marching up the Learning Curve: The Second Buy-Side Algorithmic Trading Survey,” was administered to head traders at 60 top buy- side institutions. It follows a similar survey conducted in 2005 by Financial Insights and Bank of America, which aimed to gauge buy-side trading habits, such as adoption and usage of algorithms, direct market access (DMA) platforms, and electronic communication networks (ECNs). The 2006 survey focused on measuring how execution and order management practices have evolved since the previous appraisal and weighing the future landscape of electronic trading.
“We’ve come to a point where the market largely understands the benefits of program trading and the survey shows that the industry has accepted equity algorithms as an effective means of reducing transaction costs, optimising trade execution, and maximising overall workflow efficiency and profitability, but this is just the beginning,” says Bill Harts, the Head of Strategy for Equities at Bank of America. “As we have witnessed with our clients, increased demand for more sophisticated, market-adaptive algorithms has driven innovation beyond what anyone thought possible, and we are only now starting to realise the full potential of these powerful tools.”
“The 2006 survey results show that buy-side firms, regardless of size, continue to actively manage their own trades,” adds David Cox, the Chief Research Officer at Financial Insights. “A greater emphasis on returns has forced firms to look at transaction costs more closely and focus increasingly on best execution practices. As transactions grow in complexity, incorporating multiple strategies and asset classes, algorithms that can minimise costs while providing anonymity and ease of use will be in high demand.”