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Capital Markets

Trading: An algorithmic arms race

Despite concerns, long-only funds are trying to flatter their returns

Algorithmic trading
Expected increase
year-on-year

Algorithm-based equity trading is expected to account for as much as 25% of overall trade volumes by 2008, compared with about 14% in 2004, according to a study by financial services technology consultancy Celent. Algorithm usage by long-only funds is expected to increase at a compound annual growth rate of 28%, while hedge funds are expected to increase their usage by 11% and the sell side by 7%.

The growth in the use of algorithms by long-only funds is being driven by an imperative to flatter often unimpressive investment returns through better trading. Buy-side funds are expected to increase their use of algorithms so that they can reduce the amount of time their traders spend on simple trades, allowing them both to handle more trades and spend more time on the more complex ones.

The buy side appears to be happy to increase its use of algorithms despite an acknowledged poor ability to measure trade performance. Although most brokers that offer algorithmic trading services also offer post-trade analytics tools and there are a few independent providers, data from a soon-to-be-released study by consultancy the TABB Group shows that 44% of buy-side funds say they are suspicious of broker transaction-cost tools.

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