With liquidity becoming increasingly diminished due to heightened volatility, hedge funds and money managers are having to turn to new technology, according to a Tabb Group report.
The annual report, "Institutional Equity Trading 2019: Liquidity: Blocks, Algos, Analytics, and Impact,"reveals that the use of such technology among investment firms as block trading, conditional orders, central risk books, algorithmic execution and algorithm (algo) wheels, "are going to be ubiquitous and necessary" over the next year, said Campbell Peters, an analyst at the Tabb Group and co-author of the report, in a phone interview.
The report's executive summary said trading algorithms have become an increasingly important accessory for managers, while central risk books — systems that both measure risk exposure and help offset risk — are becoming crucial when market liquidity isn't sufficient, especially for larger managers.
Managers are also beginning to integrate transaction cost analysis and routing analysis into their decision-making processes and using more data inputs than ever to ensure profitability and efficiency.
The challenge, however, is that all of these products are costly, which could prove to be a problem for the smaller managers.
"The smallest firms are having the hardest times adopting these new technologies," Mr. Peters said. "They don't have the scale to make it feasible."
Mr. Campbell added that over the next year, more firms will begin using these products, while those that do already will be relying on them more.