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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March 15, 2007

The Responsible Trader

By Michael Scotti

Bridgeway Capital is tight with a penny and generous with a dollar. That, says Dick Cancelmo, a portfolio manager and head of trading, is part of what makes this Houston-based quantitative money manager a fulfilling place to work.

Because its own models drive its investment decisions and paying brokers for research isn't necessary, Bridgeway's unbundled commission rate is seven-tenths of 1 cent. "We have to be good stewards of our shareholders' money," Cancelmo says.

Charity is also a hallmark of the firm headed by John Montgomery, as half the firm's profits at the $5 billion money manager are earmarked for charities. "This is a special place," says Cancelmo, who joined as the firm's first trader in 2000. Today, there are five traders.

Besides overseeing trading, Cancelmo runs the firm's Balance Fund-a mixture of options, index and fixed-income strategies that has delivered an average return of 7.68 percent over the last five years. "I've always had this love for options," says Cancelmo, who began on the floor of the Philadelphia Stock Exchange in 1980. "I think selling puts to acquire stock or to generate income is a neat investment strategy."

It was the options business that brought Cancelmo to Houston. He took a job at regional broker Rotan Mosle and worked on its upstairs options trading desk. He eventually launched his own options mutual fund in 1996. His West University Fund peaked at $5 million and had some very good years, but market conditions eventually took their toll on the one-man show. In March 2000-at the height of the bubble-he disbanded the fund, which wrote covered calls. "When the Nasdaq was up 90 percent, people didn't care about 8 and 9 percent returns," Cancelmo recalls.

That's when Bridgeway's Montgomery hired Cancelmo, keeping alive the idea that Cancelmo might, at some point, be able to relaunch his options fund. Two years later, he did.

One initiative this year is to take a closer look at using customized algorithms. The desk executes about 90 percent of its flow electronically-80 percent through direct market access and 10 percent via crossing networks. But it rarely uses algorithms for the 1.5 million to 2 million shares it trades every day. With five traders on the desk, Cancelmo says there isn't much need to use algorithms.

Other initiatives include analyzing whether the firm's current OMS-Advent's Moxy-can continue to handle the load as the firm grows, and looking at additional trade-cost analysis vendors to supplement the work of Plexus Group.

Cancelmo admits to being a bit nostalgic about the diminishing importance of exchange floors, as electronics gain steam. It is "unfortunate" that it will be harder for young people to enter the business, and fewer people will get the same opportunities he did. "That's the greatest single place to learn the investment process, from the bottom up," he says.

Bridgeway Capital Equity AUM: $5 billion Desk: 5 traders Broker List: 13 firms Avg. Comm.: 0.7 of 1 cent OMS: Advent's Moxy Trade-Cost Analysis: Plexus Group