Portfolio Strategy

North America Market Commentary 12 July 2010

Ana Avramovic
+ 1 212 325 2438 AES Analysis
Phil Mackintosh
+ 1 212 325 5263 A Tactic for All Times: Algo Usage Growing
Key points Algo Usage Up 18%
Traders are increasingly embracing algorithms, as evidenced by the growing
Traders continue to embrace algos, popularity in Credit Suisse AES tactics over last year. When we adjust for the
evidenced by a strong growth in usage change in overall market volumes, the amount executed using Credit Suisse
year-over-year. AES has increased an impressive 18% in 2010 compared to the same period
Three trends are particularly interesting: in 2009.
Inline used less in the trending
Exhibit 1: YoY Change in Avg $Value
y Traded by Tactic (Q1 2010 vs Q1 2009)
markets of Q1 2009. This may be 50%
because it was less suited to strongly VWAP

trending markets. But, recent 40%

Avg Notional 2010 Q1 / 2009 Q1 ...

GUERRILLA PATHFINDER
performance suggests it may be time 30%
to revisit the shortfall-minimizing tactic.
All CS Algos CROSSPLUS
Traders less aggressive with 20% TWAP
CUSTOM
Guerrilla. As volatility subsided in 10%
2010, traders switched to more
patient versions. 0%
Volatility brings traders out of the -10% IWOULD
SNIPER
dark. Dark pool activity seems to be
inversely related to volatility. Not only -20%
INLINE
do traders seem to get more
-30%
aggressive as volatility spikes, but they
seem to come out of the dark too. Source: Credit Suisse: AES Analysis
Looking at Shifts in Popularity
While we see usage gains across the board, there are some interesting
trends that highlight how traders vary their tactic selection as algos and the
Exhibit 2: Avg Inline Shortfall Over Time market evolve. This is consistent with discussion in our earlier report, Trade
by Trade Size Smarter to Raise your Alpha Profile, where we found there was no single
best tactic. Instead, traders should adjust algo selection to suit different
types of alpha and market regimes.

Less Inline Usage in Trending Bull Market

Inline is popular as a shortfall minimizing strategy, but in fact, it acts like a
shortfall (bps)...

value investor: waiting for dips to buy more.

Heading in to 2009, the market was trending down strongly, and then it
quickly reversed course and headed back up - patterns that dont favor the
0 - 0.1% ADV
0.1 - 0.5% ADV
Q1 Q1 Inline strategy. As a result, performance of Inline was (understandably) worse
2009 2010
0.5 - 2.5% ADV
than normal (see Ex 2).
Jun-08

Sep-08

Jun-09

Sep-09

Jun-10
Dec-08

Dec-09
Mar-08

Mar-09

Mar-10

However, once the volatility declined and markets became more range-bound
in 2010, Inline performance also improved (Ex 2). Traders who shifted to
Source: Credit Suisse: AES Analysis other algos because of relative shortfall performance should reconsider Inline
as market volatility subsides.

AES
The Standard in Algorithmic Trading
 Portfolio Strategy

Traders Slow Guerrilla Down as Vol Falls

Exhibit 3: Breakdown of Guerrilla orders by One of the more aggressive algos, Guerrilla, does not post orders and
aggression level: 2009 compared to 2010 protects against gaming by incorporating a fair value into its limit price.
Q1 2009 Furthermore, there are varying levels of aggression within the Guerrilla
strategy. We found that as traders increased their use of Guerrilla in 2010,
they preferred relatively more patient versions.
Aggressive Normal Patient
45% 47% 9% Exhibit 3 shows that traders used normal and aggressive strategies almost
equally in Q1 2009, as volatility peaked, with only a small amount trading
patiently. By contrast, in Q1 2010, when the market turned range-bound,
Q1 2010 the number of orders sent as aggressive was 1/3 as much, with the bulk
(70%) of normal aggression.
Aggressive Normal Patient
15% 70% 15%
It seems that when volatility is high and uncertainty reigns, traders tend to
care more about getting a fill, rather than trying to save fractions of a cent in
spread costs with a passive limit order, but potentially subjecting oneself to
Source: Credit Suisse: AES Analysis severe market movements.

VWAP: Old Faithful Back in Fashion?

In terms of usage, VWAP saw the largest relative gains year-over-year.
Although not the most sophisticated strategy, VWAP still holds an important
place in a traders arsenal, especially for long-short funds. This is because
VWAP maintains delta- and factor-neutrality throughout a trade, even in
volatile markets. The VWAP algo will match the execution rates between
buys and sells, resisting the urge of more sophisticated algos to increase
participation as markets move favorably, thereby avoiding undesirable
exposures from one side completing faster than the other side.

Volatility Brings Traders Out of the Dark

Exhibit 4: Crossfinder Volumes vs VIX We discussed above how traders tend to down-shift their aggression level in
(proxy for dark pool volumes)
3.5% 84
response to higher volatility (see Exhibit 3).

3.0% 72
Another consequence of increased volatility is a preference for displayed
liquidity. As noted above, when markets are choppy, traders prefer the
Crossfinder % of All Volume

2.5% 60
certainty of a fill to other considerations, giving lit venues a leg up on dark
2.0% 48 pools.
VIX Index

1.5% 36 Credit Suisses Crossfinder is the largest dark pool, accounting for nearly
1.0% 24
25% of all dark liquidity, so Crossfinder volumes are a good proxy for overall
dark pool volumes. As we can see in Exhibit 4, there is a very strong inverse
0.5% 12
relationship between dark pool activity and the VIX index.
0.0% 0
Smart order routers are necessary in order to navigate the vast array of
Apr-08

Apr-09

Apr-10
Jan-08

Jul-08

Jan-09

Jul-09

Jan-10
Oct-08

Oct-09

trading venues, both dark & lit. Because of this, the Credit Suisse SORs,
Crossfinder Volume VIX
Pathfinder (for lit venues) and Crossfinder+ (for dark liquidity), continue to
prove popular. While smart order routing is automatically embedded in all
Source: Credit Suisse: AES Analysis algos, sending an order directly to an SOR can reduce latency, critical in
todays markets.

2
AES
The Standard in Algorithmic Trading
Portfolio Strategy

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AES
The Standard in Algorithmic Trading