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.

Traders Poll

Are you in favor of a pilot program and examination of the rebate system by the SEC?




Free Site Registration

February 1, 2004

Buyside Traders Reborn: More responsibilities,more functions and managers who give them new respect

By Nina Mehta

Also in this article

  • Buyside Traders Reborn: More responsibilities,more functions and managers who give them new respect

Philip Orlando, a senior portfolio manager at Federated Investors, has

a dedicated phone line that connects him with Diane Startari, the trader who handles his large-cap orders. He talks to Startari or e-mails her many times a day.

"Diane is very much a partner and collaborator in what I'm trying to do," said Orlando, who adds that she has full discretion over his trades.

"She knows the other side of the trade better than I do. I'm not going to take bullets out of her hand."

Buyside traders, often regarded in the past as second stringers by portfolio managers, are finally overcoming their inferiority complexes. Regulatory, economic and technological changes that have transformed the equities trading marketplace over the last decade have spilled over into the workplace. They have redefined the relationship between traders and portfolio managers.

Improving Returns

For starters, traders play a greater role in helping buyside money managers improve returns. And there's a lot to improve. The average domestic equity fund was down almost 21 percent in 2001 and was little better in 2002. Although stock funds made a recovery last year, there's still a lot of damage to repair, especially on the Nasdaq side.

"In the triangle of portfolio manager, analyst and trader, the trader was not always considered a professional equal," said Joan Stack, trading manager at the Ohio Public Employees Retirement System (OPERS), a pension fund with $59 billion under management. "But as the markets have become more demanding and the technology more sophisticated, the trader has been forced to achieve the same level of sophisticated professionalism as managers and analysts," Stack added.

In the past, traders often arrived from the operations side of the business - from securities settlement, stock loan services or other areas that touched peripherally on the trading process. Now they increasingly come out of MBA programs or are encouraged to work towards a CFA designation.

One reason for the change is decimalization. Because block trades are more difficult to execute, traders now need more market expertise and knowledge of electronic communications networks (ECNs) and other venues. More complex markets require faster and more fine-tuned decisions.

For traders, the key to the changing role is technology. At most institutional money management firms, just about the entire trading process - from order generation and management to trade execution and transaction-cost analysis systems - has gone electronic.

Today, many portfolio managers enter orders directly into an order management system. If not, they write a ticket, which is entered into the system by an assistant or a trader. Then the order typically stays in the OMS, where its execution, even in multiple venues, can be monitored and benchmarked by the trader.

The trader's decision about how to handle each order is critical to the price and the speed of execution. "If a trader consistently executes in one particular marketplace because they're unknowledgeable, that's going to show up in the transaction cost analysis because they're missing liquidity," said Paula Peter, manager of equity trading at Pittsburgh-based Mellon Private Wealth Management, which has $35 billion.