Cover Story: Keeping Watch
Traders Magazine, May 2012
Execution Quality
Despite the lag, at least one buysider is encouraged by the big brokers’ efforts. The thinking behind it is “insightful,” said Enrico Cacciatore, a senior trader at ING Investment Management. “It forces the brokers to dive into their pools and provide this information to their clients—to show them what is going on in the pool,” Cacciatore added.
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ING is likely a prime beneficiary of the trend, as it has built its own smart order router. It is intimately involved in where its trades get done. By contrast, most buysiders simply leave the routing decisions to their brokers.
But for another buyside trader, who also closely monitors his execution quality, there are better ways to avoid trouble than to rely on broker monitoring.
Tereck Fares, Chicago Equity Partners
Tereck Fares, director of equity trading at Chicago Equity Partners, with about $3 billion in equities under management, contends more effective deterrents are to specify a minimum trade size as well as establish contra-party blacklists.
“We’ve imposed minimums for a very long time now,” Fares said, “because the toxic players don’t want to risk capital in amounts greater than 100 shares. So, that way, you’re already bypassing a lot of the junk. You don’t need to monitor. You need to recognize that some of the players bring nothing to the table except the illusion of liquidity.”
Many of the operators of dark pools disagree with Fares, contending the HFTs inject valuable liquidity into the system. At Barclays, for instance, part of the effort to track trader behavior in its LX pool is being done to show that labels don’t necessarily mean much.
Bill White, a former options trader and the architect of the firm’s market-making platform at the New York Stock Exchange, is now in charge of Barclays’ electronic trading group. When he started in the position early last year, he immediately abandoned the idea that simple categorization served to protect participants from predatory behavior.
Banning an HFT, for example, was ineffective because the HFT could simply re-enter the pool through another broker-dealer.
“They would leave and then come in through the back door,” White said. “So we realized that these front door thresholds were doing nothing for our clients.”
Moreover, White understood that smart or aggressive trading behavior was not limited to professionals. Traditional buyside trading may appear just as predatory as that of the often vilified high-frequency trader. A buysider using a top quality VWAP algorithm, that takes liquidity at precisely the right moments, for example, may look just as predatory as a short-term trading professional.
When it comes time to have a chat with an overly aggressive trading firm, no single group gets more calls than any other, White said. His crew has reprimanded HFTs for abusive latency arbitrage strategies. They have also warned buysiders against using too-clever algorithms.
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