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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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August 31, 2000

King Goldman Sachs Rules:

By Sanford Wexler

Goldman Sachs & Co. has the highest overall quality of listed and Nasdaq executions, according to a new survey.

Goldman, Sachs & Co. is the King of the Hill. A group of buy-side and sell-side pros and hundreds of publicly-traded companies, delivered the verdict: Goldman has the highest overall quality of listed and Nasdaq executions - in U.S. large-cap and in small to mid-cap issues.

The venerable investment bank took the top honors in each category in separate surveys conducted recently by London-based Tempest Consultants. The complete survey, sponsored by Reuters, examined investment research, sales and trading and investment banking.

Goldman outclassed Salomon Smith Barney and Merrill Lynch & Co., second and third place winners respectively, in the small to mid-cap categories. On the large-cap side, Goldman took the top trophy again, beating Morgan Stanley Dean Witter and Salomon Smith Barney, second and third place winners respectively.

"We put our customers first and are committed to excellence," Jody G. Mansbach, vice president, equity trading at Goldman Sachs told Traders Magazine. In a brief interview, she added that, "the relationships we have and the breath of experience that our traders have" makes Goldman special.

Methodology

The survey of large-cap companies polled 368 corporations, 372 sell-side analysts, and 49 heads of trading at funds accounting for about $328 billion of equity assets. The survey of small to mid-cap corporations polled 536 corporations, 374 sell-side analysts and 27 heads of trading at funds accounting for about $321 billion in assets. (Respondents at corporations included chief financial officers and investors relations directors.)

Overall, about 100 of the largest buy-side firms were contacted.

"The survey offers extraordinary insight about perceived excellence of equity research, sales, trading, and investment banking services in markets around the world," said Michael Fidance, vice president at Tempest and a former senior position trader at Lehman Brothers and at Credit Suisse First Boston.

Goldman had an impressive record on the many categories the respondents were asked to judge the dealers' desks for: consistency of execution and/or market making; capital commitment; executing large blocks as principal (at risk); market knowledge and trading intelligence; morning news sheet/research synopsis; program trading and settlement and backoffice efficiency.

The so-called Reuters Survey, underlined a distinction between trading mid-to small-cap and large-cap stocks: the role of capital commitment. That made Goldman's double victory all the sweeter.

Tempest noted that the amount of business conducted as principal is nearly double for U.S. small-caps (42.22 percent) than it is for U.S. large caps (22.65 percent).

Best Execution

To be sure, the poll is based on a tally of essentially subjective responses.

The survey does not, in effect, measure best execution, a goal set by regulators with their emphasis on price improvement and individual investor protection.

The best way to accurately measure "best execution," noted Alan Shapiro, chief executive of Transaction Auditing Group (TAG), a trade measurement service for dealers based in New York, is through "in-depth, quantitative measures rather than qualitative analysis."

The Reuters Survey does not pretend to fulfil that goal. Howard Haykin, president of Compliance Solutions, a compliance consultant in New York, said it was possible that some dealers in the survey were ranked near the top because they received "positive responses."

"But firms that provide best execution or even better execution might not have been identified," he added.

One trader had mixed views about the Reuters Survey. The "problem" with it and similar surveys, said Peter Jenkins, director of equity trading at Scudder Kemper Investments, "is that there are so many ways of doing them. Not everyone agrees with the outcome. They are only as good as the information and data they have."

Nonetheless, Jenkins does believe the survey provides some valuable feedback to the broker dealer community.

Qualitative Factors

Fidance of Tempest noted that there are a number of qualitative factors, captured in the survey, that help achieve excellence in best execution: portfolio manager input; commission targets; directed commissions, arrangements on step outs and on soft dollars, marketing agreements, and broker lists.

"All these are internal factors within the fund' manager's trading department that have an impact on best execution," Fidance said. "We think they are part and parcel of the kind of things that we [measure] in the Reuters Survey."