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 1, 2001

At Dedline

By Editorial Staff

ECN Mover

*Rapid growth at REDIBook last year brought it close to passing the Island ECN for the number two spot in the ECN sweepstakes. REDIBook's volume shot up to 7.3 billion shares in the fourth quarter from 1.9 billion a year earlier, according to data from J.P. Morgan H&Q. It now accounts for 16 percent of all trades made through electronic communications networks. Island traded 8.8 billion shares in the fourth quarter, giving it a 19.5 percent share of the business.

REDIBook's gain came mostly at the expense of Instinet, the largest ECN. Instinet saw its share drop from 45 percent at the end of 1999 to 36 percent at the end of 2000 when it processed 16 billion shares. Not all of those REDIBook shares represent completed trades, however. About half of them are just passing through. Traders looking for liquidity will still find more on Instinet and Island where volume consists almost entirely of buyers meeting sellers.

SuperSOES

*Early in the third quarter, Nasdaq will try again to launch SuperSOES, its automatic-execution trading system. It's Nasdaq's fifth attempt and follows a failed testing in January. At the request of market makers, deployment will occur in three stages. Each of the first two will involve trading of a small group of securities. The final stage will include the balance. Also, at the request of market makers, the system will allow faster trading than was envisaged in the original design, according to Nasdaq. The delay between executions against a single market maker's quote is being reduced from a minimum of two seconds to "a handful of nanoseconds," according to Dean Furbush, the head of Nasdaq's InterMarket.

The change was made to appease traders who complained that liquidating positions would take too long under a two-second regime. Finally, market makers convinced Nasdaq to adjust SuperSOES so their quoted sizes would be decremented by odd lots. Traders worried that unscrupulous day traders would hit them with multiple odd-lot orders that would, in total, exceed their quoted sizes.

Delistings

*The traffic between Nasdaq and its OTC cousins, the Bulletin Board and Pink Sheets, is not one way. For example, Flowers Foods Inc., Ceridian Corp. and Cheniere Energy Inc. all "graduated" from the Bulletin Board. The first two landed on the New York Stock Exchange, the third on the American Stock Exchange. Even so, nowadays there are more companies going the opposite way. For the first two months of this year Nasdaq delisted 65 companies compared with 240 in all of 2000. Bankruptcy and the market downturn are mostly blamed for the current delisted crop.

"Just look at what these pressures are doing to stocks like Intel and Cisco," said Nicholas Ponzio, president of Hill Thomson Magid. "Their share prices are a fraction of their highs. The same pressures on a company that was selling for three or four dollars a share can be devastating."

Market Drop

*Veteran trader E.E. "Buzzy" Geduld said the market plunge has been "extremely orderly." Geduld, chief executive at Herzog Heine Geduld, noted that previous downturns were characterized by panic. Jack Del Duca, a sales trader at Banc of America Securities said trading is "relatively quiet." Volume is down at the desk, especially from some of the large funds. Other firms are generating high transaction volumes due to large sell-offs while some say they are seeing a considerable slow down.

While overall Nasdaq volume remains historically high, individual firms are seeing big drops. Volume is down at the three largest Nasdaq market makers: Knight Securities, Schwab Capital Markets, and Geduld's firm Herzog Heine Geduld. As of March 19, Knight's average daily OTC volume is down to 305 million shares since the start of the year, compared to some 533 million in the same period last year, according to Thomson Financial's AutEx BlockDATA. Some of the recent spike in volume is attributed to end of quarter "window dressing" by mutual funds that dump poorly performing stocks. They will sometimes replace them with stocks that improve the performance of their portfolios.