Robert Hegarty
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Reinventing Trading Venues: How AI Can Help Create a More Efficient Market

In this whitepaper shared with Traders Magazine, the Hegarty Group examines how artificial intelligence and machine learning can help traders execute more efficiently.

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April 1, 2011

'Flash Crash' Report Under Fire

By Peter Chapman

Such a rule could make it significantly more expensive for brokers to internalize, or fill their customers' orders in-house. Last year's SEC concept release suggested that price improvement could be as much as 1 cent over the market's best bid or 1 cent under the market's best offer. That's a considerable amount in an era where spreads on many stocks are a penny. Higher price-improvement costs could lead brokers to route out more of their flow.

That doesn't sit well with some internalizers. "One of the advantages of matching up two client orders at the bid or offer is that I don't have to send it to the public market and run the risk it will be gamed," said Owain Self, UBS's head of algorithmic trading for the Americas and the EMEA region, at this year's TradeTech USA conference.

The fear of gaming by high-frequency traders has become a major concern for money managers and their brokers these days, as the amount of fast-paced speculative trading has surged.

"If all of the orders wind up in the lit markets, who's going to be first in the queue every single time?" Self asked. "It will be the HFT, because he's faster than everybody else. So I will always be behind him. He knows what my clients are doing. Internalization is a way to limit that."

Dmitri Galinov, head of liquidity strategy for Credit Suisse's Advanced Execution Services group, operator of the CrossFinder dark pool, also believes trade-at is a bad idea. He noted that it costs more to route an order to a stock exchange or ECN than it does to route to a dark pool. "Why should I be forced to pay 30 mils at an exchange when I can take a dark pool and pay five mils?" he asked at TradeTech. "It doesn't make sense."

Despite their opposition to a trade-at rule, most of the dark pool operators are skeptical one will be written into the rulebook any time soon. For one thing, the SEC has too much on its plate to tackle such a controversial proposal.

"I don't see it happening this year," Galinov said. "It's probably unlikely next year, as well."


(c) 2011 Traders Magazine and SourceMedia, Inc. All Rights Reserved.


(c) 2011 Traders Magazine and SourceMedia, Inc. All Rights Reserved.