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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April 30, 2000

At Deadline

By John A. Byrne

Foreign Markets

Nasdaq is eyeing acceleration in stock trading activity in Europe and Asia. That helps explain its alliances abroad. "We believe the IPO market in Europe and Asia is going to explode," Richard G. Ketchum, president of the NASD, said at a STANY breakfast in New York. "We are going to be part of that."

New alliances are happening at a rapid pace. The proposed merger between the London Stock Exchange and Germany's Deutsche Boerse may include a trans-Atlantic Nasdaq connection. Nasdaq announced that it plans to establish, in conjunction with the government of Quebec, a Montreal-based exchange called Nasdaq Canada.

Nasdaq Market Maker Level III terminals will be placed at broker dealers in Quebec pending governmental approval. Trading will be initially confined to Nasdaq stocks denominated in U.S. dollars. "We are definitely trending toward a global market," said Dennis Green, director of Nasdaq trading at Legg Mason Wood Walker in Baltimore. "If we can get the links in, it would be good for all of us."

Routing Moves

Instinet, the largest alternative trading system, is set to become a destination of TradeRoute. That gives the order routing network an electronic link to the top three electronic execution points for buy-side traders. The other two are Bloomberg's Tradebook and ITG's POSIT. The latest addition is considered a good measure for buy-side traders who complain of too many Nasdaq execution points. TradeRoute users will be able to eliminate a separate connection to Instinet.

TradeRoute, which is operated by AutEx/Thomson Financial, steals a march on its competitors - Bridge, TNS, and IXnet - in the routing of Nasdaq orders, observers say. Basic routing functionality, however, may not be enough to keep some sophisticated competitors at bay. Two electronic brokerages used by daytraders - CyBerCorp and TradeScape - announced their intentions to pursue institutional business. Their so-called 'smart routing' software aggregates the books of all the major ATSs onto one screen, making the routing decision for the trader. TradeScape recently poached two top executives from Instinet.

Nasdaq Tools

Sometime this summer a semi-privatized Nasdaq will begin selling a trading system to market makers. Nasdaq acquired the system when it purchased the small technology shop Financial Systemware, from Fleet Boston. That gives Nasdaq ownership of the Tools of the Trade order routing and quote management software. The system competes with established companies and upstart vendors.

Tools is being transformed into a complete routing and position management service bureau, which has compliance functionality. Small dealers Huberman Financial of Dallas, and Turnwater of New York, are already using the upgraded version, according to Deepak Shah, vice president of the renamed Nasdaq Tools.

Tools is used by about 130 traders to sweep the quotes of multiple market makers with one click over SelectNet. That functionality will soon be obsolete. Nasdaq is largely changing its execution environment from the automated SelectNet to the automatic SuperSOES for all NMS stocks. Tools will only work for trades in the Nasdaq SmallCap market and for trades sent to electronic communications networks and the Chicago Stock Exchange, Shah said.

Capital Risk

Volatile trading sessions put trading firms' capital commitments to the test. One trading pro said huge losses and gains can occur in seconds when a desk extends millions of dollars to an institution unloading a trade. Cantor Fitzgerald in New York said it upped the amount of capital it committed on block trades by 25 percent in one recent session. "We stood up and traded with our clients by continuing to make markets for them and continuing to service them," said Peter DaPuzzo, a senior managing director at Cantor Fitzgerald. "It was natural that capital commitment went up."

Credit Suisse First Boston's clients were said to have put pressure recently on the firm to use more of its own capital to get them out of positions. Michael Clark, First Boston's head equity trader, told a reporter that this showed "real concern." It was "not rational and very unsettling from a structural standpoint," he said.