Algorithmic Trading Continues to Take Root

February 12, 2007 ( - According to a recent survey, algorithmic trading has become a standard practice within the securities industry with 72% of investment managers responding that they use algorithms, up from 67% in 2005.

The survey, conducted by Financial Insights and sponsored by Bank of America, showed that among hedge funds the figures are virtually unchanged with 93% of respondents reporting experience with algorithms, a news release said.  Hedge funds have emerged as “early and avid adopters” of algorithmic technology, according to the press release.

While these figures suggest the market has reached maturity, there remains significant growth potential as trading technologies become personalized and more sophisticated. Some 63% of participants, for example, stated that their usage of algorithms had increased in 2006 and unlike the year before, no respondents reported a decrease.

“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, optimizing trade execution, and maximizing overall workflow efficiency and profitability, but this is just the beginning,” said Bill Harts, Head of Strategy for Equities at Bank of America, in the news release. “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 realize the full potential of these powerful tools.”

Among the findings of the survey, according to the announcement:

  • Overall, electronic trading achieved a greater level of buy-side penetration in 2006, compared with the year before. Newer forms of automated execution, such as algorithms (95%) and DMA platforms (90%), remained a regular practice for the vast majority of respondents. Moreover, the number of respondents who executed more than 10% of their total order flow algorithmically jumped to 33% versus 25% in the 2005 survey.
  • Increasingly, the buy-side is moving past simpler algorithms and calling for tools that can help them manage more complex trades. In 2005, VWAP (volume-weighted average price) was by far the most commonly used algorithmic program among those surveyed. In 2006, however, only 40% of respondents regularly used VWAP and/or TWAP (time-weighted average price), down from 75% the year before. Conversely, the percentage of participants using more advanced proprietary strategies jumped significantly, especially among hedge funds, with 57% relying on in-house algorithms versus 33% in 2005.
  • The 2006 survey shows “clear evidence” that the buy-side is becoming more comfortable relying on trading technology, but there is still room for improvement. In 2005, nearly 23% of respondents listed lack of understanding as a main impediment to using algorithms, where none of those surveyed cited that as a problem in the 2006 survey.

The survey, entitled “Marching up the Learning Curve: The Second Buy-Side Algorithmic Trading Survey,” was administered to head traders at 60 buy- side institutions. The survey was administered by phone to a random sample of head equity traders from 60 of the top 500U.S. buy-side firms. These included investment managers, pension funds, and hedge funds with managed assets totaling up to $71 billion.

More information is  here .