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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June 30, 2001

At Deadline

By Editorial Staff

Downsized

*Josephthal & Co., the investment banking and full-service brokerage firm, has fired much of its research, sales and trading staff. "We are facing the same kind of problems that are hurting much of the rest of the industry," a spokeswoman told Traders Magazine. She confirmed that some 20 to 25 people had been fired.

Wall Street observers have been saying that Josephthal's problems are part of a wave of expected layoffs as industry's profits have been pinched. Josephthal's woes go beyond industry trends. It recently paid a $3.3 million fine. The National Association of Securities Dealers recently charged the firm with unfair dealing in its sale of VictorMaxx stock. It is a virtual reality company that Josephthal helped take public in the summer of 1995.

The firm hasn't underwritten an IPO since the fall of 1999.

Liquidity

*Strategic order placement is the secret to finding adequate liquidity in the market without substantially affecting the price, according to an academic study. "Institutional traders who simply partition their order mechanically over the day with the objective of trading at the value weighted average price could benefit from attempting to time their trades to take advantage of periodic liquidity surpluses while avoiding liquidity defects," writes ITG's Ian Domowitz, previously a professor of finance at Penn State's Smeal College of Business and the co-author of a study, "Liquidity in an Automated Auction."

He also warned that a reliance on an automated auction system to provide liquidity and a good price can be dangerous. An automated auction, he wrote, "is dependent on public limit orders for buying and selling a security. If the limit order book is thin, even small trades can induce large price movements, increasing trading costs and volatility," Domowitz wrote. The study examined a cross-border automated limit order book system. That is typical of many markets, including the Toronto Stock Exchange and the Paris Bourse.

Reuters

*Reuters will not combine Bridge Trading with its Instinet/Lynch Jones & Ryan unit after it completes its acquisition of the agency brokerage and various other pieces of the bankrupt Bridge Information. Although Instinet/LJR is a competitor, Reuters will permit Bridge Trading to operate as a stand-alone entity within Reuters, according to outgoing Bridge Trading chief executive Mark Minister.

Minister cites three reasons for the decision. First, Instinet has just completed the integration of LJR and is not eager to tackle another job. Second, customers would likely trade less with the two firms combined than they now do with each individually. Third, customers value the close relationship between Bridge Trading and the Bridge Information market data service. That could be lost if Bridge was merged with Instinet. Reuters does plan to integrate Bridge Trading's ancillary order routing service, called IOE, with its own networks, Liberty and GL, Minister said.

SuperSOES

*With SuperSOES poised to dramatically transform interdealer trading, Nasdaq intends to share its tape revenue with market participants who supply liquidity to its system, according to a senior Nasdaq executive. Dan Franks, Nasdaq's executive vice president for market operations, said the program, to take effect later this year, is intended to encourage traders to post quotes or limit orders. Many traders, especially some market makers, are apparently questioning the value of posting quotes in the auto-ex environment of SuperSOES, according to Franks. Under SelectNet, dealers could post nominal quotes and take their time executing incoming orders. Under SuperSOES, their quotes can be hit or taken immediately with only a brief interval before they are automatically refreshed. "Why be a market maker these days?" Franks asked rhetorically. Sharing tape revenues with dealers is not unusual. Regional stock exchanges do so with specialists. Nasdaq, itself, has been offering traders similar inducements in its InterMarket since last September.