More on Algorithms Going Mainstream

In case recent layoffs from the floor of the New York Stock Exchange weren't indication enough, Bank of America's second annual survey on buy-side trading habits clearly demonstrates the widespread use of algorithms on Wall Street. It's good, but not unexpected, news for traders with the right combination of IT skills, trading expertise and knowledge of quantitative strategies.

The survey shows algorithmic trading has become standard, with 72 percent of investment managers - and 93 percent of hedge funds - saying they it in their work. Although such penetration suggests a mature market, the increasing sophistication of trading technology portends more growth: Sixty three percent of those surveyed said their use of algorithms increased in 2006, and no one reported a decrease.

"Increased demand for more sophisticated, market-adaptive algorithms has driven innovation beyond what anyone thought possible, and we are only now starting to realize the full potential of these powerful tools," observes Bill Harts, Head of Strategy for Equities at Bank of America.

Sophistication Means Pressure

Overall, electronic trading achieved a greater level of buy-side penetration in 2006. The number of traders who executed more than 10 percent of their total order flow algorithmically jumped to 33 percent in 2006 from 25 percent in 2005.

In addition, the buy-side is moving past simpler algorithms and looking for tools that can help manage more complex trades. Fifty seven percent of the survey's respondents relied on in-house algorithms in 2006, compared to 33 percent in 2005. This means pressure is on solutions providers to maintain their pace innovation. Buy-side firms are already beginning to consolidate both their brokerage and provider relationships. Where in 2005, 50 percent of the hedge funds surveyed used four or more algorithmic providers, only 28 percent did so in in 2006.

Who's in Demand

Those with the right combination of IT skills, trading knowledge and expertise with quantitative trading strategies stand to benefit from the spread of algorithmic trading.

Earlier this year Lou Ricci, president of the Hagan-Ricci Group, said especially in demand are those with quantitative research skills, as well as individuals who can bring their own trading strategies to hedge funds and bulge bracket firms. Ricci's company specializes in front office hiring in IT, trading and quantitative research.

"On the lower end, the ideal job candidate in the algorithmic trading arena is the person with the right programming skills. At the top of the game are the Ph.D. types who can build the algorithms, as well as traders who can bring together the strategy and IT side of it," Ricci said.