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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February 1, 2012

Cover Story: Full Disclosure

By James Armstrong and John D'Antona Jr.

Still, there would be a definite advantage to knowing each venue where an order is sent. If firms could better track order flow, they might be able to pinpoint where leakage occurs and make sure they avoid those venues.

Identifying the one step where an algorithm goes wrong could allow firms to tweak an algo rather than discard it entirely.

"I have more than one example where I've been using a particular algo and it's been working great for six months, becomes my top algo, and then it stops working the way you expect it," Lewis said. "The stock starts moving against you, and you can't figure out why. You stop using that particular algo. You move on to another one. That one works for a little bit, and then all of a sudden, it stops working."

Sometimes the problem is that one of the venues used by the algo has become home to a predatory HFT who has been able to detect a signal on a big order. If that's the case, and the trader can identify where the signal is coming from, he or she can work with the sellside to modify the algo and avoid that venue.

Lewis said improved transparency will help the sellside and the buyside come together with greater clarity on where leakage might be occurring and shut off those venues rather than having to scrap an entire algo.

Markit's Hagmeyer said certain dark venues have a larger concentration of HFT presence than the buyside might realize. He added that the sellside has been working with the buyside to limit HFT dark pool penetration.

One way to do that is for dark pool operators to institute a minimum order size constraint for dark orders. This discourages HFTs, who usually post small-share orders to sniff out flow from larger institutions. Markit has looked at price reversion-the way a stock moves back toward a desired execution price after the order is filled-but Hagmeyer said that is not necessarily an indicator of HFTs.

Andrew Silverman, Morgan Stanley

"It could be an indicator that you're trading with a more informed counterparty-not just HFTs," he said. "However, using a simple price reversion measure is not good enough because other market dynamics can cause a price reversion that is not related to the presence or absence of the client order."

Morgan's Problem

Morgan Stanley has been pressing the Securities and Exchange Commission to consider mandating that brokers give their customers quarterly reports detailing how they route orders. Any report would include the name of the trading venue, where the order was sent, where it was filled, all the venues the order was routed to and the level of fill rates at each venue.