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July 1, 2011

Virtu Financial's Concannon Discusses...

By Editorial Staff

Chris Concannon, a senior executive with market maker Virtu Financial and former head of transaction services at Nasdaq OMX Group, recently addressed the topic of high-frequency trading at Sandler O'Neill + Partners' annual global exchange and brokerage conference. Here's what he had to say. 

Chris Concannon

On HFT pickoffs

You rarely hear these complaints in the most liquid assets. The buyside isn't complaining they are being front-run or picked off in an S&P [500 stock]. They are more concerned about a less liquid stock-a mid-tier stock. I see bad algos being deployed in the market. Algos originally designed for S&P stocks are being used in [the smallest stocks]. They are deploying a strategy that signals the market. And they are signaling not just computers. They are signaling investors that are clicking on a keyboard. I hear it all the time. People say "I know when a buyside order is engaged with the market."

 

On the future of algorithms

There's frustration, a lot of misunderstanding about who is trading what and how.

In the end, you will start to see different labels. Whether it is an electronic market-maker label inside the broader label of HFT, or an agency HFT broker. We will end up with a much more sophisticated buyside execution strategy. You hear about them being developed today. They are algos that are attempting to trade those less liquid names in a much more sophisticated fashion and not an algo that was originally designed for Microsoft being deployed in a stock that trades 100,000 shares per day.

 

On minimum quote life

Many people are concerned, and not just the guys with a lot of cancels. Every time you post a quote, you've posted an option to the market, and you've given that option up. The time value of that option can be costly, however long that option is hanging out there. You can go to a minimum quote life, but end up with a wider spread.

People will quote less aggressively because that quote is stuck for a period of time.

 

On the use of minimum quote life in the foreign exchange market

Both Reuters and EBS use minimum quote life. They're not the most efficient markets. If you compare how FX is traded electronically versus U.S. or European equities, minimum quote life is not good for the end user, given the spreads and natural liquidity that should be in that market. It's not the right answer. You would just be creating another problem for users, because everybody will be subject to minimum quote life. It would create unintended consequences.

 

On market-maker obligations

We need more structure. First, there is a slight benefit. But more important, the perception we have of our markets immediately following the "flash crash" is of a broken market where there is no obligated liquidity. It's fleeting liquidity. I don't believe that market-maker obligations will improve our market dramatically and prevent another crash. But having obligated liquidity in our market does help from a perception standpoint.

 

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