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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March 1, 2000

At Deadline

By John A. Byrne

Options Traders

The decision by the Securities and Exchange Commission to grant exchange status to the International Securities Exchange (ISE) highlights a movement by top Nasdaq market makers to transfer their trading skills to the options arena.

Seven of the top 12 Nasdaq market makers will be options specialists on some U.S. exchange once the electronic ISE opens its doors in May. Knight/Trimark, Goldman Sachs, Morgan Stanley Dean Witter and Bank of America Securities entered the fray last year when they signed on as "primary market makers," or specialists, at the ISE. Bear Stearns, Spear Leeds & Kellogg and Fleet Securities are all longtime exchange options specialists. Bear Stearns will also be a specialist at the ISE. Five firms - Mayer & Schweitzer, Salomon Smith Barney, Merrill Lynch, Herzog Heine Geduld and Sherwood Securities - do not make markets in options. Herzog, one of the original investors in the ISE, is considering it though. "It's under conversation," said Buzzy Geduld, Herzog's president.

Nasdaq Trouble

The General Accounting Office in Washington has warned that Nasdaq may run into capacity problems later this year with the switch to decimal stock pricing. The consequent surge in stock quote traffic could overtax the Nasdaq network, the GAO said, citing a study by SRI Consulting. While that's not exactly hot news it does put more pressure on Nasdaq to upgrade its technology to avert a long, hot summer. Wall Street has been ordered by the Securities and Exchange Commission to make the switch to decimals, starting on July 3.

Davi D'Agostino, acting associate director for financial institutions and market issues at the GAO, told the panel that "Nasdaq is having trouble processing their current demands without decimal trading, so there are things Nasdaq is going to have to do to ready itself for decimals.'' A Nasdaq spokesman said, "We want to make sure that when we convert to decimals we do it in a way that does not create problems for investors."

Weisel Eruption

Thomas Weisel Partners is making capital on the hot technology sector. The San Francisco merchant bank, run by Thomas Weisel, ranked as the sixth most-active investment bank in the 289 Internet IPOs completed in 1999. On cutthroat Wall Street, that might help explain why the knives are drawn at Bank of America Securities, which acquired Weisel's Montgomery Securities for $1.3 billion in 1997. The bank is reportedly seeking $500 million in damages against former employees and Thomas Weisel Partners. Soon after the acquisition, Weisel quit his post at the bank. Weisel, a tough jock who loves biking, took some trading and other pros to his new outfit.

More than 100 ex-Montgomery staffers are said to work for him at his 500-person merchant bank. The Bank of America case was sent to the National Association of Securities Dealers for arbitration. A spokesperson for Weisel did not return phone calls seeking comment.

Market Structure

As regulators debate U.S. market structure, some traders complain about current problems. Several observers blame governmental tinkering for fragmentation and stock price volatility. They look at efforts, such as a Senate Banking Committee hearing in New York on market structure, as somewhat ironic. The observers are also curious about six models proposed by the Securities and Exchange Commission to improve market structure.

Barbara McFadden, a trader at Peregrine Capital Management in Minneapolis, blames volatility, in part, on the proliferation of ECNs and active day traders. "Small firms like Datek [Online Holdings] are tapped into the big market makers in stocks," McFadden told Traders Magazine. "As soon as a Morgan Stanley shifts sides in a stock, everyone else comes tumbling in." Matthew Andresen, president of Island ECN, which is operated by Datek, disagrees. "Volatility is inversely proportional to liquidity," he said in an interview. "I believe retail investors who are adding so much liquidity are actually lessening the affect of volatility."