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John Turney
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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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April 2, 2012

Traffic Jam

By Michael Scotti

High production is typically a good thing on Wall Street. To be called a top producer is a title of respect. That is no longer the case, however, for excessive producers of quote traffic on exchanges. Both Nasdaq OMX and Direct Edge are looking to charge high-frequency traders that burden their system with too many quotes and messages. The new pricing does provide an exemption for registered market makers. For Nasdaq, HFTs who exceed a ratio of 100-to-1 of orders-to-trades will pay a fee. Direct Edge will reduce its rebate to HFTs who exceed the same 100-to-1 ratio on messages-to-trades. The SEC has been talking about this issue, and so have some of the large brokers, who have complained that it costs them money to provide bandwidth for message traffic. But as you'll read in this month's story "Exchanges Set to Tax Heavy Quoters," not everyone is in favor of the move.

Despite the cold shoulder from some corners of the industry, HFTs have, by choice, often shunned small caps. And who can blame them? These less-liquid issues can be tough to trade. This month's cover story takes a look at how algorithms are taking a larger chunk of small-cap trading from the high-touch desk. James Armstrong's piece talks about the confluence of events that have pushed algo trading to about half of all shares of small caps traded. That's a big jump from just a couple of years ago, when the high-touch desk ruled the roost for small caps and algos traded maybe 20 percent of them.

As the story points out, less available capital has been one driver for the increase. But also, desks have downsized. Throw in greater fragmentation and improved technology, and the rise in small-cap trading with algos makes sense. You can gain additional insights in this month's story "Last Vestige: Traditional Small-Cap Trading Fades as Algorithms Gain Sway."

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Another factor that helped to fuel this move is traders' adaptability. At first, small-cap algos didn't work well, but traders got the hang of them out of necessity. At this year's TradeTech conference, the discussion turned to algorithms. But one conclusion reached was that traders use their intuition more than scientific analysis when choosing an algorithm. That applies throughout the life cycle of an algo. Christopher Willox, director of trading for Fenimore Asset Management, told the crowd he'll use an algo until it no longer works. "If it's not fulfilling my needs at the time," Willox said, "I'm going to throw it out the window." I take it he meant figuratively, unless his algo salesman is nearby.


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