According to Brad Bailey, a senior analyst with research and consulting firm Aite Group, there are seven sure-to-see trends emerging in the algorithmic trading space.
1. Global Reach. "Going global is a very big thing in the algorithm space," says Bailey. Bulge-bracket firms are doing a great deal to expand into Asia and Europe as a result of demand from hedge fund clients that want to participate in these marketplaces.
2. Reorgs. Most of the major bulge-bracket firms are reorganizing their equity desks to offer customers a single point of contact rather than multiple contacts for multiple products. "The contact has to be very savvy," Bailey warns, and understand the market, how trading works, what the algorithms can do, and the details of the various offerings.
"It's about efficiency," Bailey notes. Because they're not getting as much of the order flow - as the buy side is executing orders on their own - the sell side can't afford redundancies. Bailey adds that the trend also is client driven, to some extent, as it is easier for the client to have one contact knowledgeable in all areas.
3. Special Sauce. "There is a race to get more and more sophisticated algorithms out," notes Bailey, explaining that many buy-side firms are looking for the ability to adapt algorithms on the fly based on market conditions. "They are looking for sophistication on several levels - the ability to be more adaptive by using different analytics allows traders to tweak algorithms as conditions are changing," he says. "Everyone is trying to offer that 'special sauce' or something that will differentiate them."
4. VWAP Less Popular. The use of VWAP, although still important, is decreasing on a percentage basis. Usage of algorithms in the implementation-shortfall category, on the other hand, are increasing.
5. Portfolio vs. Single Stock. Many broker-dealers are developing algorithms that can work on a portfolio rather than just on a single stock. Now, the buy-side manager can put in orders for 100 stocks rather than just one and analytics will be performed on the entire portfolio.
6. Dark Pools. All the broker-dealers are offering or are planning to offer algorithms that allow buy-side traders to access different types of dark liquidity.
7. Customization. The buy side is becoming more sophisticated and firms are looking for algorithms that they can customize to fit their needs. They either are tweaking sell-side algorithms or developing their own.
Certain companies now offer event processing software, which cuts the buy side's development time, Bailey notes, making the development of algorithms less cost prohibitive than it once was. Bailey points out that only certain types of asset managers would want to develop their own algorithms, such as sophisticated hedge funds.