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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January 1, 2001

The Index Fund Trader

By Sanford Wexler

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  • The Index Fund Trader

Brian Smolinski, 39, a trader at Lyon Street Asset Management in Grand Rapids, Mich., has a goal: He tries to add value to each trade. Smolinski, a Michigan native, is the sole trader for the Kent Index Equity Fund, an S&P 500 mutual fund with some $900 million in assets.

"I try to add value by beating the strike price when a stock goes in or out of the index," he said. "I also give limit orders to broker dealers so that they don't mess around with the price. I usually have the luxury to wait around to get the price."

Smolinski never imagined he would be doing this kind of work when he graduated from college in 1985. He earned an undergraduate degree in marketing from Western Michigan University in Kalamazoo, Mich., as well as a graduate degree in finance.

Two years after he graduated in 1985, he joined the trust department at Old Kent Bank, a Grand Rapids-based financial institution that was founded in 1853. Old Kent is the parent of Lyon Street Asset Management.

Lyon Street manages some $5 billion in assets for institutional clients, individuals, and mutual funds, including the Kent family of mutual funds.

Smolinski specialized in technology applications support, including converting systems of trust departments at banks that were acquired by Old Kent. He switched, a few years ago, to the trading side of the business. "When I first started at Old Kent, I never thought I'd be trading," Smolinski said.

Settlement Pressure

Today, about half of all Americans are invested directly or indirectly in the equity marketplace - whether it is in mutual funds, 401(k) plans, or individual stocks. Smolinski expects individual investors to increase their trading activity in the coming years. That means trading volume will grow.

"People seem to have more of a short-term, time frame," Smolinski said, "and so they are more apt to trade more often than they did in the past."

That increase in trading volume will add pressure to the clearance and settlement system, forcing it to become more efficient. It will hasten the introduction of settling trades within 24 hours of trade execution, analysts say.

"With T+1 you won't have much lead time to work on problems," Smolinski said. "It will necessitate having more efficient systems in place."

Smolinski performs about 20 to 30 trades each day and deals with some 20 broker dealers. The biggest headache that Smolinski faces with the sellside is in settling trades. "Their backoffice may screw something up." he said. "Unfortunately, it's my job to clear those things up after the fact. The most annoying part is clearing up mistakes that usually come from the brokers' backoffice." For example, Smolinski said, a broker dealers' backoffice might split up a trade and erroneously put the wrong commission on the transaction.

Smolinksi does not think decimal pricing will have a significant impact on his trading activity. But he does acknowledge that dealers will have to cope with much narrower spreads.

"How they make their money may come into question," he said, "but that doesn't really affect me."

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