Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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August 1, 2012

Shifting Playing Field

By Michael Scotti

Rules are a dominant force in equity trading and have been for about a decade. It is evident from looking at a few stories in this issue. Former sales trader Melissa Heathcote found equity trading can change quickly. She learned this in 2007, after returning to the business after two years in real estate. Ms. Heathcote is featured in our Buyside Snapshot this month. When she returned to trading, her first step was adjusting to Reg NMS, which had just gone into effect. She soon got the hang of the new rule, but also had to adjust to the buyside. This former Alex. Brown trader also offers some interesting observations this month.

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Our cover story is on the evolution of indications of interest. Not long ago, IOIs were usually broker fishing expeditions looking for a block order-there often wasn't really a client order behind the indication. But things changed. Today, IOIs are clearly marked by brokers as natural. They typically have a real order behind them. The story discusses the reasons why. Yes, there's a regulatory reason.

It should also be noted that an auto-ex function is on the horizon. This type of IOI is referred to as "actionable." Yet this click-and-trade IOI is, surprisingly, not bad news for the high-touch desk, both the buyside and sellside report. Sales traders are still expected to play a vital role when actionable IOIs are introduced.

Ready for more regulation? Here's one that might actually be good for the industry. There's a chance that less-liquid stocks could trade at a wider tick size. That would be a result of the JOBS Act. Our feature looks at how wider ticks could bring more liquidity into the marketplace for small stocks. It's an interesting question: If broker-dealers can make money trading and provide research, will that backing be enough to convince small companies to go public? These companies are considered job creation engines. The SEC is putting together a study, so we'll see where this leads.

The regulation of exchanges and dark pools has been hotly debated recently. Exchanges are more regulated than dark pools, so are they at a disadvantage? Duncan Niederauer, chief executive of NYSE Euronext, thinks so. Dan Mathisson, who heads U.S. equity trading at Credit Suisse, thinks ATSs are at a disadvantage. You can read their comments on this issue taken from their testimony before Congress in June. Enjoy the issue and the balance of summer.

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