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December 8, 2009

High-Frequency Trading Divides Buyside

By James Ramage

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  • High-Frequency Trading Divides Buyside

When a veteran like Robert Shapiro says he isn't sure exactly how high-frequency traders operate and how they impact institutional orders, then it's safe to say that he is not alone. At the Traders Magazine conference in September, Shapiro told attendees that there is greater mystery surrounding these rapid traders for the buyside than there is certainty.

Robert Schapiro

As someone who oversees trade optimization and execution quality at Morgan Stanley Investment Management, Shapiro has a clear window into the trading process. But even he is flummoxed on this topic. "Forget it," Shapiro said. "You know just enough to be dangerous, but not nearly enough to understand what they do and protect yourself against it--assuming they're even doing anything to you. Who knows? There's no evidence. But you've got to be crazy not to want to explore this topic further."

His view echoes the rampant uncertainty and ambivalence among the buyside when it comes to high-frequency trading. In fact, a recent Greenwich Associates survey of the buyside offered a wide range of opinions on high-frequency trading.

Mostly, the Greenwich results showed that institutions are unsure whether high-frequency traders benefit or detract from the quality of liquidity and the marketplace. The buyside respondents were also mixed on whether there should be new regulation on high-frequency trading.

More than half--or 57 percent--of the participating institutions that interact regularly with high-frequency traders said such traders' strategies should be regulated. But almost as many--or 55 percent--said they do not feel that those strategies put them at a disadvantage.

Still, 87 percent of survey participants agreed on one thing: There is no hard data available to determine definitively whether high-frequency trading increases or decreases trading costs.

Jason Lenzo

"Both detractors and those touting the liquidity provision and spread-tightening benefits of high-frequency trading have little data to back them up," said one survey participant from a U.S. asset management firm.

In the survey, Greenwich defines high-frequency trading as "strategies that seek to take advantage of small market inefficiencies." Their activity accounts for between 50 and 70 percent of all market liquidity, according to estimates used or quoted in the survey.