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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November 1, 2003

At Deadline

By Editorial Staff

Buyside

*Buyside institutional clients want to bar specialists from competing with customers and in listed stocks prefer a large electronic market with a real-time order book. Those are some of the conclusions of a survey of buysiders by Greenwich Associates. The survey was commissioned by Instinet and polled 103 large money managers. Some of the other findings: "Nearly half of respondents would prefer to trade more off the exchange floor," according to the survey. And the most common reason given was "mistrust of the specialists." ECNs, according to the survey, were three times more likely than an exchange and twice as likely as an upstairs broker to deliver low market impact. Two thirds of the traders said that Big Board specialists and Nasdaq market makers don't add value in trading stocks. Respondents said the most important factors are low market impact, anonymity, price improvement and certainty of execution.

NYSE

*The New York Stock Exchange is promising an overhaul of the specialist system. The Big Board plans to require specialists to change their methods of accountability, standards of performance, the transparency of information and trading. "Those will be very big changes for the New York Stock Exchange," Catherine Kinney, NYSE co-president and co-coo, told the Security Traders Association's annual conference. The NYSE is currently in the midst of an investigation into specialist trading infractions. Five specialists may have to pay fines as high as $100 million in the aggregate. Kinney said that a committee of buyside, sellside and trading floor executives is working to create a set of "definitive measurements" of specialist activities. "This accountability will go right down to the individual specialist," Kinney said.

SEC

*One of the five SEC commissioners is leaning towards modifying or eliminating the ITS trade through rule. Cynthia Glassman says a change would both remove barriers for customers for whom best execution means something other than best price, and focus attention on the brokers' best execution analysis. "It is the broker who is in the best position to know what his customer means by best execution," Commissioner Glassman told the Security Traders Association's annual conference in Scottsdale, Arizona. "The availability of execution quality statistics for broker dealers and market centers informs the brokers' decisions as to where to send his customer's order."

Glassman noted that the trade through rule is meant to protect limit orders, but says the trade off is the ability of slow markets to hold up fast markets for a very small number of shares. "This inhibits competition in the fast markets," Glassman said.

Capital

*Capital commitment is making a quiet comeback at many block trading desks. It had started to disappear in the wake of decimal pricing and the shift to agency style trading on Nasdaq. Now, buyside firms are shipping more business to dealers putting up capital.

"There is a growing demand for capital commitment on institutional orders," according to Eric Noll, a trading executive at Susquehanna Financial Group. "It is going to become a more critical component of the market." That's because of competition. "There has to be a reason today why institutions will do business with you," Noll said.

"With us it is capital commitment and research. For others, it might be prime brokerage," he added.