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February 1, 2011

Buyside Welcomes Anti-HFT ECN

By James Ramage

When Credit Suisse's new ECN debuts in March, it should find a ready group of customers. Apparently, the buyside believes there's room in the crowded field of trading destinations for another market center that caters specifically to long-term investors.

Credit Suisse's ECN, called Light Pool, will come with a message: No opportunistic traders allowed. This means that firms with short-term alpha strategies--such as many high-frequency traders--won't be welcome in the ECN.

And that's just fine with Ted Oberhaus, equity trading director at the asset management firm Lord Abbett. He is among several buyside traders who told Traders Magazine that they are eager to try out Light Pool. In theory, Oberhaus said, building a market center that prevents HFTs from stepping between the negotiations of two buyside traders is a good idea.

"Anytime you pull together just long-only investors, it's great for asset accumulation in the asset manager's business model," Oberhaus said. "So, conceptually, it works for me."

HFTs are welcome in Light Pool, too, so long as they behave themselves accordingly, said Dan Mathisson, head of Advanced Execution Services at Credit Suisse. This means they can't pick off other investors' orders.

Credit Suisse will use an objective quantitative formula to determine the intent of those who use Light Pool. AES will measure the short-term alpha--a calculation of excess return--from customer fills. Clients found to have short-term alpha are labeled "opportunistic," and can't have a direct connection or send orders anymore directly to Light Pool, Mathisson said.

And because a displayed order under Regulation NMS must be accessible, the opportunistic trader would have to access the quote via order delivery from one of the exchanges. That adds delays and costs, Mathisson said.

"It's expensive and it's slow to take a Light Pool order if you're not connected," Mathisson said. "They can take a displayed offer through an exchange. But they won't be able to trade versus any hidden liquidity, and they won't be able to post a bid or an offer."

Clients who have flow that doesn't display gaming behavior get classified as "contributory" and may trade uninhibitedly. Once inside Light Pool, it's a straight matching engine with price-time priority for those providing liquidity.


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