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August 1, 2010

RBC's Electronic Trading Group Grows Head Count With An HFT Flair

By John D'Antona Jr.

Take a page out of the high-frequency traders' playbook and offer it to institutional clients. That's the game plan at RBC Capital Markets' electronic trading group.

Long known for its high-touch trading business, RBC has quietly been building out its electronic trading desk since 2009, looking to earn a piece of the electronic trading revenue pie, said Brad Katsuyama, head of electronic sales and trading at RBC Capital Markets.

"We saw the opportunity to make an investment there," Katsuyama said, referring to when RBC revamped its electronic desk last year. "We are building agency algorithms for buyside clients."

All told, the electronic trading group has hired about 70 professionals. Those hires have come across the board in sales, trading and technology.

Katsuyama said the interesting part is that building proprietary and agency strategies have a lot of similarities: There is the need to understand market microstructure, order placement and, ultimately, how to incorporate models and analytics into execution decisions.

"So, understanding this concept, when we decided to enhance our client-facing tools, we decided to recruit talent from the high-frequency industry to help our clients compete with them," Katsuyama said. Roughly a dozen of the hires came from HFT backgrounds, he added.

By ratcheting up its electronic trading offerings, RBC wanted to allow clients another way to pay for its research and, ultimately, grow its commission levels with clients.

"By not having a full-service electronic offering, we were only competing for a fraction of the client commission pool, and our goal has been to gain share in all facets of the business," Katsuyama said. "This is evidenced by our concurrent build-outs in U.S. program trading, ETFs, options and convertibles."

Previously, within the firm's global equities group, its secondary trading revenues were driven by its high-touch business, with only a small amount coming from electronic trading.

Also, increasing its presence electronically would help RBC answer client questions on high-frequency trading that it was receiving--effectively killing two birds with one stone. Katsuyama said its clients were expressing frustration at not being able to access as much liquidity as they wanted and not knowing where to find it--the old fragmentation conundrum. And high-frequency trading techniques were often the answer.

Most market estimates say HFTs constitute about 60 percent of market trading volume. Yet they only represent 2 percent of all market participants, according to Aite Group.

"Such a minute percentage of participants know the intricacies of market microstructure and high-frequency trading strategies," Katsuyama said. This is what made high-frequency trading pros so attractive to hire, he said, as their knowledge of the market would be a huge benefit in building a client-facing business.

So RBC has hired high-frequency trading industry professionals, including infrastructure specialists, product developers and software engineers. They understand the intricacies of high-speed trading and can help clients understand the business.

"Knowledge is not publicly available on HFT, such as how to build strategies, what technology they are deploying, and what order types they are using; so hiring from that industry seemed natural," Katsuyama said.

 

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