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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May 31, 2004

The Natural And The Machine: Fighting back the electronic trading trend.

By Peter Chapman & Gregory Bresiger

Also in this article

  • The Natural And The Machine: Fighting back the electronic trading trend.

It calls itself the human crossing network. JonesTrading Institutional Services,

a firm once regarded on the Street as a low-profile third market broker, is counting on its human traders to expand its stock trade volume. And to that end, it is aggressively promoting its extraordinarily high crossing ratio.

Under significant pricing pressure, it is ending a nearly 30-year policy of working quietly in the shadows. The firm, until recently known as Jones & Associates, is boldly attempting to draw more attention to its specialized services. JonesTrading's new business strategy, say observers, may be a reaction to the changed economic pressures in the institutional equity trading markets. Money managers, also under cost pressures, are taking a hard look at alternative execution methods.

"You have the traditional firms on one side and the computers on the other," Packy Jones, son of the founder and the firm's chairman and chief executive told Traders Magazine. "We try to be right in the middle." These computers are a reference to the growth in electronic-oriented trading services that typically charge bare-bones commission rates.

Crossing Power

At the heart of Jones is crossing. Working out of head offices in an upscale suburban community of Los Angeles - as well as from several satellite locations - the agency broker claims it executes 45 percent of its volume as matches between money managers. Of the firm's 124 employees, 62 are sales traders, who cover a network of 700 to 900 money managers.

The comparisons with its competition are striking: They typically may have hundreds more customers. Nonetheless, the percent of the order flow these bulge-bracket rivals typically cross is in the single digits.

But to grasp Jones' impact on the market, consider the ServiceMaster Company (SVM). The home maintenance company is listed on the New York Stock Exchange. The stock, not a stellar performer in recent years, trades about 600,000 shares per day. Last July, the stock was trending down towards the $9.50 level. A major institution needed to sell ten million shares. So it called Jones.

"We ended up crossing a little over 10 million shares," Packy Jones says. "The trade was so large we had to print it in two parts on the consolidated tape."

Rather than ask its traditional full-service firm to trade the name and risk a serious case of market impact, the institution (Jones would not disclose the name) asked Jones to tap its network. The result? Considering the size of the order, Jones' efforts produced minimal market impact. SVM traded within a 25-cent band during the three days Jones worked the order.

SVM, which has a market capitalization of $3.5 billion, is at the high-end for Jones. The firm sees about two-thirds of its flow in small- and mid-cap names. Although it has a reputation in large deal stocks due to its relationships with arbitrageurs, Jones is better known for moving large blocks of less-liquid names.

"The majority of stocks are small- and mid-cap," says Mike Hornbuckle, president of JonesTrading. "But that's just because it is easier for the buyside to pay off the rest of the Street with bigger-cap orders."