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 25, 2007

Hedge Funds Rely on TCA

By Michael Scotti

Trade-cost analysis is more likely to play a role in compensation for traders at hedge funds than it does for those at so-called "traditional managers." That's according to a Traders Magazine survey conducted last month. (See related story this January 2007 issue)

Just under 70 percent of hedge fund respondents to the survey said their trade-cost analysis scores count toward compensation. Hedge funds represented 16 percent of survey participants. Conversely, only about 27 percent of traditional managers reported that trade-cost analysis measures are figured into their compensation formula. That means that about one-third of the hedge funds surveyed aren't concerned about beating a benchmark when bonus time comes; for traditional managers, two thirds don't need to worry about besting a benchmark, like arrival price or VWAP.

Hedge funds and traditional managers shared similar views throughout the survey. However, 19 percent of the hedge funds viewed trade-cost analysis as "very reliable," while only 1.4 percent of traditional managers viewed it similarly. Still, traditional managers closed the gap in the next choice. About 23 percent said TCA was "mostly reliable," while just 12.25 percent of the hedge funds viewed it as such.

Both hedge funds and traditional managers were also similar in their investment styles: 50 percent of the hedge described themselves as "active managers," while 57 percent of traditional managers who participated actively pick stocks.

 

River Cross Sets Launch

* River Cross, the latest broker consortium in the crowded dark-liquidity space, expects to be up and running in the second quarter. The anonymous, fully automated block crossing platform was incubated at Susquehanna Financial Group.

River Cross will be an independent company, owned by Susquehanna and a group of broker-dealers. These brokers may include firms with equity stakes in LeveL and Block Interest Discovery Service, the two broker consortia that already exist. The platform is expected to have outside developers, staff and salespeople. River Cross will offer a crossing model that is unlike existing models, says David Margulies, who is in charge of sales for the program and algorithmic trading group at Susquehanna Financial Group.

Margulies notes that crossing systems have a match rate that, on the high end, is 6 percent to 9 percent. "So your chance of getting an order done isn't great," he says. "There are ways in River Cross that you could greatly increase those chances." Trades in River Cross will occur within the national best bid and offer.

-Nina Mehta