When the Going Gets Tough, the Algos Get Going

Abstract

This article examines how the market turmoil of September to November 2008 affected trading costs in general performance, and algo performance in particular. It also examines how traders responded to the new challenges created by the market turmoil. How does one execute trades in the new environment? Trade more high-touch or low-touch? Trade more or less aggressively?

The analysis compares the market turmoil period to a normal “benchmark” period, May 2008. It finds that in the market turmoil period: 1) quoted spreads on the S&P 500 stocks increased 50% and quoted depth decreased 50%, 2) algo usage remained steady at 21% of executed value but algo clients shifted to more aggressive executions, 3) the liquidity impact of the average 20,000-share order in the sample more than doubled to 25 bps (10 bps in May), and 4) alpha-to-close was higher, so despite the higher liquidity impact the average algo client captured some alpha-to-close.