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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February 1, 2005

At Deadline

SRO System

*The SRO system should be "totally overhauled," according to a scathing one-page comment letter filed at the SEC Website by a former Pacific Exchange regulatory watchdog. "During my time at the exchange I was constantly pressured by senior management to lighten up on the members in a disciplinary way because of the constant threat that the members would take business elsewhere," according to Kenneth J. Marcus. He oversaw equity stock trading compliance at the Pacific from 1984-2000. Marcus complained that it became "apparent that the business interests of the exchange could not compete with the disciplinary requirements and responsibilities of the '34 Act." The current system, now under review by the SEC, allows business interests to adhere their "own obligations to disciplinary requirements," Marcus charges.

Xpress

*The New York Stock Exchange plans to shut down its Institutional Xpress block trading system. In a filing with the Securities and Exchange Commission, the Big Board proposed to rescind the Xpress order "in light of the Exchange's recent hybrid market filing." The hybrid market proposal would let traders outside the exchange execute large blocks instantly, neutralizing any value of Xpress. The four-year-old Xpress was also built to execute blocks quickly, but it never was popular. That's because executions are not automatic. Xpress initially let traders post quotes of 25,000 shares on the specialist's display book for electronic execution. Orders had to remain on the book for 30 seconds, though, and could still be broken up by brokers. Despite reductions in the parameters to 15,000 shares and 15-second waits, the system never handled more than a dozen trades per year.

Revenues

*Equities sales and trading revenues were up on the Street last year. Eight of the top eleven investment banks reported a combined ten percent increase in their institutional equities businesses. The group grossed $19.5 billion last year, up from $17.7 billion in 2003, according to press statements. The eight are Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup, Lehman Brothers, J.P. Morgan, Bear Stearns and Banc of America Securities. The other three firms - Deutsche Bank, CSFB and UBS - had not reported by the time Traders Magazine went to press.

Of the top eight, Lehman showed the most improvement. The broker grew its revenues by 20 percent to $1.9 billion in 2004. Only Banc of America, the smallest of the group, had a bad year. It saw its revenues decline by 13 percent to $861 million. Greater customer activity, in both shares and derivatives, fuelled the group's surge, according to the firms. Derivatives, however, fared worse than cash equities due to lower volatility.

Timing

*Traders who practice market timing on the sly beware. That's what a Securities and Exchange Commission official said at a conference hosted by Northwestern University Law School. Stephen Cutler, the director of the SEC's office of enforcement, says the regulator, which heretofore has targeted certain fund families that illegally market time, now will go after traders who engage in the practice. The regulators intend to take a firm stand on this sensitive subject. Cutler said the SEC and New York State Attorney General Eliot Spitzer, along with other state attorneys general, will be very active in this area.