The Stars Are Aligned for a Significant Increase in Algorithmic Trading


The Stars Are Aligned for a Significant Increase in Algorithmic Trading2021 offered another wild year for the global markets, punctuated by disparate returns across asset classes and volatility. The volatility in the market combined with ongoing remote working situations and volume spikes from individual investors added to the complexities of optimizing trading alpha and created new challenges for traders and solutions providers alike.  

When we asked traders about the most impactful features of algorithms and their providers, they cited ease of use, customer support and services, dark pool access, and increased trader productivity. In other words, “Make it easy for me to access liquidity so I can focus on the trades where I can add alpha.”    

While the distribution of algorithm usage by value traded shows significant variability year over year and across asset classes, it should come as no surprise that long-only buy-side traders increased their use of algorithmic trading in 2021. More than half, 57%, of respondents reported trading more than 50% of this value via algorithms, a jump from previous years. Between 2019 and 2021, the percentage of firms trading more than 50% of their volume via algorithms hovered between 49.4% and 50.9%.

In isolation this change might look like an anomaly, but, in conjunction with the priorities that users of algorithms highlighted and the increased use of participation algorithms, it seems that firms are actively looking to ensure participation across liquidity sources. Algorithms that ensure participation were the most frequently used, with % Volume, Dark Liquidity Seeking, and VWAP all used by roughly three out of four survey participants. Those three algorithms also saw the biggest year over year increase in use.

There are a number of explanations for the increased use of participation algorithms and the broad adoption of all kinds of algorithms.

Aite-Novarica believes the big three are as follows:

  1. As we hit our second year of travel bans, relationships continue to erode, and that will lead traders to adopt more automated ways of executing transactions.
  2. The increase in retail equity trade flow makes algorithms a fit-for-purpose tool relative to ensuring active participation in liquidity.   
  3. The tools and education offered by providers continue to improve and drive adoption.

What Traders Want

Despite significant improvements in algorithmic trading solutions offerings in 2021, buy-side traders always want more.

When asked what features and functions need to be added, the answers mirrored market evolutions:

  • They want more control—All or None, GTC, and different participation rates based on venue type.
  • They want solutions that can help them trade at the close of the market or Trade at Last (TAL) strategies.
  • They want more customization, both firm-specific customizations and solutions designed to specialize in the needs of different markets, such as large cap and small cap.
  • They want advice and guidance on how best to leverage the tools providers are putting in their hands and better solutions to measure the performance of those algorithms.

It’s a lot, but if past years are any indication, providers are up to the challenge.

2022 is shaping up to be another year of volatility, which is likely to drive increased use of algorithmic trading. Combined with the evolution of electronic trading in non-equities and ongoing improvement in tools, Aite-Novarica Group is looking to see step changes in how buy-side traders are accessing liquidity in the next two years. The evolution of those liquidity sources will be a primary focus of our research this year. 

This blog post was adapted from the full analysis of The TRADE’s Algorithmic Trading Survey Long-Only 2022. You can read the full survey here. To discuss this topic further, please reach out to me at [email protected].