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April 2, 2012

Insights Galore at TradeTech

By John D'Antona Jr. and James Armstrong

The mood at March's TradeTech USA conference in New York was muted this year, as the roughly 800 attendees continued to weather another year of lower volume and reduced commissions. Still, that didn't stop them from discussing high-frequency traders, algorithmic trading and the quality of sellside services.

HFTs have been expanding into new markets and asset classes so they can maintain current profit levels. That was the message to attendees from Joe Gawronski, a trading expert and top executive at Rosenblatt Securities.

"After 10 years, the HFT business model is maturing," Gawronski said, explaining that it is difficult to make money in the U.S. equity marketplace given the low volatility, declining volume and narrow spreads. That's why global expansion into new asset classes makes sense.

Citing internal data, he said that HFTs' U.S. equities profits were down in 2011 to between $1 billion and $2 billion-which is down big from their 2008 heyday of as much as $4.49 billion. Also, HFTs now make less per trade than in 2008: Today they make on average between $.00075 and $.0005 per share on each trade, versus $.0015 to $.001 a few years ago.

Several emerging markets are ripe, Gawronski said, including Brazil, Russia and Turkey. "And some players are yet to even fully deploy in developed markets like Canada and Europe, which have seen an evolution of trading similar to the U.S.," he added.

Despite HFTs' difficulties in the options market, due to liquidity constraints, Gawronski sees them moving into FX and fixed income. He also pointed out that HFTs are competing and often beating out big banks for talent on the technology side. They are also adding former regulators to payrolls.

Even with the onslaught of high-tech solutions, traders still rely on gut instinct when choosing an algo or deciding to deep six one. They don't take a scientific approach. That was the consensus of one panel discussion.

Speaking on a panel titled "Elusive Liquidity: Perceptions, Myths & Realities," Owain Self, global co-head of direct execution at UBS, said to rigorously test an algo in a scientific manner requires a huge amount of experience and special controls in place.

"What the vast majority of our clients do is base their judgment on the look and feel of how an algo works," Self said. "Trader intuition is still something that drives a lot of choices the traders make."

Christopher Willox, director of trading at Fenimore Asset Management, echoed those thoughts. He uses an algo as long as it appears to work.

"If it's not fulfilling my needs at the time, I'm going to throw it out the window," Willox said.

Eldar Nigmatullin, senior quantitative trader at AllianceBernstein, said the buyside in the future will have more analytics to make better decisions about their algo selection.

When the panel asked the audience how many felt they had a rigorous and scientific approach to selecting algos, one trader responded, "Well, sorta." No one else claimed to have such an approach.

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