Algorithmic Trading is increasingly being used by all kinds of firms in the financial markets. But who are the primary users of algorithmic trading strategies? Are they hedge funds? Institutional fund managers? And what about the Sell-Side? Who exactly are the players in this space?
On the Buy-Side, algorithmic trading technology is generally used more by hedge funds than by the more traditional asset management firms. Hedge funds use many strategies for investing, including pairs strategies, long/short, multi-asset and various quantitative methods. Some of these lend themselves more to algorithmic trading than traditional buy-and-hold for example.
Traditional asset managers and institutional fund managers do tend to be a little more conservative with their investment strategies and are maybe a little bit slower to make use of things like algo trading. But you also have to consider the order flow. When you look at hedge funds compared with asset managers, they are both seeking alpha, but hedge funds tend to seek it on a shorter-term, faster basis. Because they are opening and closing positions more rapidly, they also require faster access to the various liquidity destinations where they trade. So algorithmic trading plays a greater part in this kind of environment.
Having said that, the bigger fund managers are now playing catch-up and some of them are using algos a lot more than they were.
Of course, when it comes down to basics, all of these Buy-Side firms are out to create alpha and to provide a return on investment in some way or other. What’s changing is how they are going about it.
Markets are more volatile than they were, prices move more quickly and traders have to take account of that fact.
On the Sell-Side of course, brokers and service providers need to be able to offer their asset management and hedge fund clients the ability to trade quickly and to send them orders using the various types of algorithms they offer. That is their challenge.
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