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October 18, 2011

Knight Uses Its Size to Thwart HFTs

By Peter Chapman

Knight Capital Group has revamped technology used by its institutional customers to help them steer clear of high-frequency traders.

Because some HFTs are looking to take advantage of the information inherent in large institutional orders, Knight has rejiggered the technology supporting its Knight Direct execution management system to avoid imparting too much information.

Specifically, the large trading house has made changes to the way Knight Direct uses the underlying "Find and Nail," or FAN, smart order router, by incorporating technology it calls "Order Awareness."

Rather than spray 30 or 40 venues in search of liquidity, the upgrade allows the EMS to tap liquidity at only a few venues, said Knight managing director Joe Wald. It does that by monitoring the performance of other similar orders it has worked.

"We've changed the way smart order routing works," Wald told Traders Magazine. "If you spray 40 different destinations at the same time, then short-term alpha traders see that and you incur market impact."

The solution for Knight has been to leverage its large market presence. Because it is continually probing both lit and dark pools for liquidity, it builds up a knowledge bank that can be tapped for subsequent orders.

If FAN discovers that a certain venue is ideal for a given security, it will send all subsequent orders in that name there. It won't bother to strafe multiple venues-a strategy that could alert market makers and other traders of its intentions, Wald said.

Knight is one of the largest trading houses on Wall Street, routinely placing in the top 10 firms, according to data provided by NYSE Euronext and Nasdaq OMX Group.


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