Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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November 1, 1999

At Deadline

By John A. Byrne

Opponents

Decimalization and extended trading have plenty of critics. An electronic survey conducted during the Security Traders Association's conference in Palm Desert, Calif. revealed that more than 60 percent of attendees surveyed strongly agree with the statement, I am concerned about how decimalization will affect the markets.' Nearly 20 percent of the respondents agreed. Moreover, 45 percent of respondents said their firms won't be ready for decimals. About 70 percent said the quote and trade increment should be five cents in decimal-based pricing.

On extended trading hours, more than 60 percent of respondents said the markets should not add extra sessions. These respondents also said they did not know if they would participate in after-hours trading. About 80 percent of the respondents said participation should be voluntary. On other issues, more than 70 percent of respondents said they do not plan to use OptiMark. More than 80 percent said Nasdaq should adopt a trade-through rule. The number of respondents fluctuated between 130 and 139 attendees. The survey is separate from an earlier survey conducted this year for the STA.

Best Execution

Broker dealers were advised at the STA conference to keep voluminous documents on their best execution practices. The advice came from Thomas Gira, a vice president in the quality of market unit at Nasdaq Regulation. Gira suggested that firms establish best execution committees to oversee their firm's best execution efforts. Gene Gohlke, associate compliance director at the SEC, said the commission is conducting a sweep of broker dealers that handle orders of under 500,000 shares. The focus is on where introducing firms choose to send their orders.

Firms are reconciling investors' demand for immediate executions over price improvement. If the public is looking for immediacy "then something has to give," said Tony Sanfilippo, an executive vice president at Knight/Trimark Group. He said public customers look for immediacy first, followed by liquidity enhancement and then price improvement.

Sentry Duty

Traders at Mayer & Schweitzer may soon be logging longer hours. Parent company Charles Schwab & Company recently announced that it would offer its customers after-hours trading.

At first, orders would be directed to REDIBook, the Spear, Leeds & Kellogg ECN, in which Schwab has a stake. But eventually, Mayer & Schweitzer will step in and commit capital, said Lon Gorman, Schwab's president of capital markets & trading. "We have six or seven volunteers at Mayer & Schweitzer for a second session," said Gorman. "These are young traders who are looking ahead in their careers."

Gorman added that Schwab will postpone making the decision to add human traders for a couple of months as it assesses the size of the REDIBook order flow. The executive is confident in the venture's success, however, noting that Schwab handles 25 percent of the online business while one-third of its customers live in California.

The market there now closes at 1:00 pm. With 55 traders, Gorman said he does not anticipate hiring new pros to staff the after-hours operation.

Concept Release

The Securities and Exchange Commission will publish a concept release seeking public comment on the regulation of the short sale of securities.

Annette Nazareth, director of the SEC's division of market regulation, said the goal is to modernize the agency's approach and "to assess whether the restrictions [of the rule] produce benefits that are proportionate to the cost of these restrictions." Nazareth, who was speaking at the STA's conference, said a concept release on market data fees is also in the pipeline.

Separately, Nazareth weighed in with her own views on decimalization, urging the adoption of nickel increments as an interim step towards penny ticks.

"While decimals will clearly make our securities prices more comprehensible, it also raises large market structure issues," she said.