Momtchil Pojarliev
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Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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August 1, 2010

Cover Story: Not So Fast!

By John D'antona Jr. and Peter Chapman

"The exchanges will always retort that co-location is available to all, and so it is fair," Arnuk said. "Of course it is available to all, as is a $1.7 million Bugatti Veyron, which does zero to 60 in 2.6 seconds. But should that class of car be the minimum required to play? If I only need a Civic, or more realistically the V6 Camaro, should I be forced to buy the Bugatti to drive on the freeway?" (see related comments from Arnuk at end of story.)

Retail brokers also worried that while exchanges tout fair and open access to co-location, they've implemented very low barriers of entry. Thus, the subsequent amount of message traffic moving to and from the exchanges and data centers has risen tremendously.

Bandwidth, a precious commodity, they say, is being monopolized by co-located HFTS who can send millions of orders and cancellations during a single trading session. In the end, it pushes out the average retail investor's order, a point the SEC is making.

While acknowledging spread costs have come down because of co-located HFTs, retail brokers like TD Ameritrade note that these firms enjoy a time and place advantage. Their advantage in getting news and quotes before everyone else won't last forever.

"They get info much faster than a retail investor in Iowa with a basic modem, but over time those gaps tend to close, such as when more firms or everybody co-locates," Nagy said. "That is what is beginning to happen now."

The bulge bracket firms are reserved when talking about the relationship between the exchanges and high-frequency traders, as they deal with both daily. The bulge said the markets were best served as long as services are transparent and fair. Otherwise, the exchanges could find themselves in the regulators' crosshairs.

"I think they're OK so far," said Owain Self, EMEA and Americas head of algorithmic trading at UBS. "But, there have to be strict guidelines on what they offer and how they offer it. They should be made to deliver these facilities in a scalable fair manner to all members."

Anyone who wants to co-locate should be able to, traders at bulge firms said. But several did note that, as HFTs constitute a large amount of exchange trading business, their influence at certain venues bears scrutiny, to make sure the for-profit exchanges are fairly allocating space in a transparent manner.

The exchanges agreed.

"Our point is that it's healthier for the market if co-location is overseen by regulated exchanges, where the pricing is public, space can be fairly allocated and it is under the SEC's jurisdiction," Mecane said. "If exchanges didn't provide it, you'd basically have the Wild West in terms of people trying to sell real estate proximity to the matching engines without any oversight."



Themis Trading Email 

Below is an email from Themis Trading, which has been a critic of certain aspects of high-frequency trading. The email response was prompted by a list of questions sent to the firm by Traders Magazine. Here is the firm's  unedited email response: