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Tim Quast
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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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April 21, 2005

Montana's Blast From the Past

By Nina Mehta

Joe Kennebeck made history recently when he joined the Montana Board of Investments. He became the first equity trader at the state pension fund as it began a technology makeover. "Until I got here there was no equity trading position. It was a function of the portfolio manager," Kennebeck says. "It was his side duty." The pension fund, which has about $4 billion in equities under management, has one domestic equities portfolio manager and six analysts. Kennebeck now executes trades in-house for the fund's domestic large-cap and mega-cap equity portfolio. The fund's international equities and small-cap portfolios are managed externally.

Kennebeck was hired for several reasons. The fund had multiple portfolio managers but pared back to one, Rande Muffick. Trading became a burden for this lone PM, cutting into Muffick's primary duties. "Rande just didn't have time to babysit the orders," Kennebeck says. "He'd go to brokers he trusted and basically give them the whole thing to do." The Montana fund also wanted to enter the advanced electronic era, reducing the use of phone-based broker relationships. "The Board of Investments wanted to get the trading process more defined," Kennebeck explains. "It wanted a clearer picture of if and how the executions could add value to the overall investment process."

Although the vast majority of buyside trading desks today have advanced technology and systems, some are still technological laggards. Indeed, the Montana fund currently has no order management system. Tickets are still written by hand. "I brought in an Instinet box to get started," Kennebeck says. He uses it to execute smaller orders. "There's no point using brokers on these small-size orders where they're not going to add value," he says. "But I may be able to add value by making some pricing decisions throughout the day and doing it myself." Kennebeck's next big project is an OMS. The fund, deciding between two OMSs, expects to have one operational by the summer. "We're targeting to get at least 50 percent of our order flow done electronically - whether that's using DMA technology or just reaching traditional brokers electronically rather than on the phone," Kennebeck says. He expects to tap into crossing systems like Liquidnet and Pipeline.

Kennebeck has a reputation as something of a one-man transition team. His last few trading positions were at firms in the process of transformation. At Electronic Global Securities in New York City, where he worked until the end of last year, he helped the software division build an agency execution business. That occurred when the firm decided to expand its direct access platform for hedge funds. Before that he worked at a broker dealer in Texas. It was switching over to self-clearing and needed to set up an in-house agency desk.

The Montana Board of Investments uses a dozen brokers. About half of them get the bulk of trades. Although Kennebeck is sometimes instructed to use certain brokers, he increasingly makes those decisions himself. Kennebeck has also stepped up the focus on best execution. The pension fund receives quarterly transaction cost analysis reports from Elkins/McSherry. However, daily broker performance is now tracked. Kennebeck has begun monitoring each broker's average execution price for stocks against the VWAP, covering the time period they have orders. At the moment, Kennebeck must still look up the VWAP for the period each broker had the order on his Bloomberg terminal, enter it into an Excel spreadsheet, and then average it out at the end of the day. Once an OMS is in place, this process should evolve into a more formal scorecard. "An OMS will definitely ease a lot of burdens," Kennebeck says.