Beyond the Data: Algo providers successfully address hedge funds’ cost concerns but execution performance is declining

In the build up to the 2024 iteration of The TRADE’s Algorithmic Trading Survey, Hedge Funds, Claudia Preece takes a deeper look at last year’s findings which saw execution performance experience the largest year-over-year decline in terms of ratings from users of any category, falling 1.60, while ‘better pricing’ jumped from 7.36 to 8.25.

By Claudia Preece

The shift of hedge funds’ algo priorities indicates the advent of a new normal as for the first time, cost took precedent over execution performance.

With the relationship between hedge funds and algos evolving at a rapid pace, key priorities are shifting. For the first time, The TRADE’s 2023 Algorithmic Trading Survey, Hedge Funds saw ‘consistency of execution performance’ drop out of the top five best rated aspects of algo usage, replaced by ‘cost’.

Execution performance had the largest year-over-year decline in terms of ratings from users of any category, falling 1.60%, while ‘better pricing’ jumped from 7.36% to 8.25%.

As the market continues to juggle increasing regulatory, technological and data-related burdens, costs are mounting, however it appears that arguably one of the more important aspects of providers’ offerings – namely the consistency of execution performance – is falling slightly by the wayside. 

Other factors aside from price improvement which also made the top five of most impactful algorithm features were: dark pool access, increased trader productivity, ease of use, and speed, the latter of which replaced customer support from the fund perspective. 

Almost half (43%) of respondents in The TRADE’s survey were based in the UK, while 31% hailed from Europe, 12% from North America (12%), and 15% from the rest of world.

Coalition Greenwich data from earlier this year indicated that in 2023, UK managers traded over a third, 36%, of their order flow by notional value via algorithmic strategies – a number which is expected to grow over the coming years – while high-touch sales trading fell by 3% to 34%.

This is predicted to see a continued downturn in the future. However, while The TRADE’s survey was littered with significant findings, what is also notable is the movement of funds towards multi-asset trading strategies.

The Survey saw new entries from key buy-side respondents which indicated instruments outside of solely equities (though this still made up the majority), namely: fixed income, FX, and ETF’s. 

The TRADE’s 2024 Algorithmic Trading Survey, Hedge Funds results will be unveiled in The TRADE’s Q2 magazine publishing in late June, exploring how things have developed over the last 12 months.