BuySide Struggles With Algo Glut
This article appears courtesy of Institutional Investor
Source: Wall Street Letter
Brokerage firms are racing to create new trading algorithms to hawk to the buy side, but the buyside isn't buying the hype. Funds are overwhelmed by the number of new products on the market, but still don't get enough service to be informed about correct use of the programmed trading strategies, traders said at last week's World Research Group conference. There are 28 algorithm providers peddling five to seven algorithms each, and buy-side traders say they're hard to compare.
"There is not enough education," said Frank Loughlin , director of global equity trading for Bernstein Investment Management and Research . "As much as 85% of electronic order flow is still executed through the VWAP, the least value-added algorithm," added Harrell Smith , analyst with Celent .
Moreover, buysiders often blame brokerages for an algorithms' poor performance when in fact the trader either misunderstood how the algorithm achieves results or made mistakes in setting benchmarks or selecting strategies. "There are times when we end up canceling out [the algorithmic order] and doing it ourselves," said Ben Sylvester , a trader at $112 billion fund Babson Capital Management .