| Plain vanilla participation
algorithms still account for the majority of algorithmic
trading volumes in most markets, according to an analysis
presented at the 2008 TradingScreen Buy Side Traders’
Conference, held in London on May 23.
Basic algorithms – such as VWAP, TWAP, price
in line and volume in line – accounted for 51.2%
of a global database of more than six million cash equity
transactions collated by TradingScreen, an execution
management system vendor, and analysed by Robert Kay,
managing director, GSCS Information Services and chairman
of the editorial board, The TRADE. ‘Dark liquidity’
algorithms accounted for only 4.9% of transactions.
The analysis also revealed stark geographic differences
in the use of execution algorithms. VWAP algorithms
were responsible for less than a quarter (24.9%) of
all transactions executed algorithmically in the US,
but 68.2% of all algorithmic transactions in the Hong
Kong equity market. “Use of algorithms is clearly
an evolutionary process,” said Kay. “Participation
algorithms will inevitably become less important over
time.”
The performance of different types of algorithms also
varied according to provider and geography, Kay’s
analysis showed. VWAP algorithms from different brokers
could yield quite variable results within a specific
market – even on a single-stock basis –
while the same broker’s VWAP algorithm could perform
better or worse in different markets. “Execution
algorithms are very differentiated tools. To get the
best out of them, buy-side traders have to work with
them over time and should seek regular input from their
brokers,” said Kay.
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