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November 1, 2012

Vanguard Exec Says HFT Helps

By Gregory Bresiger

High-frequency trading has significantly benefited the buyside, is sometimes misunderstood and was spurred into existence by Reg NMS, a Vanguard executive recently said.

Those are the contentions of George U. "Gus" Sauter, chief investment officer of the Vanguard Funds, who is retiring the end of this year after 25 years with Vanguard. In fact, he credits HFT with leading to lower transaction costs.

HFT is a good thing because "it provides tighter spreads than we would experience otherwise," Sauter said.

But critics of HFT complain it leads to spreads being crossed more often than usual because high-frequency traders are picking off limit orders. Sauter concedes the point, but said HFT traders are also putting out more limit orders.

"They're picking off limit orders that are out of range, which ends up narrowing out spreads quite a bit," Sauter told Traders Magazine. "So the mere fact that they're out there, just herding in tremendous volumes, makes it easier for us to trade."

Sauter said there are some HFT traders trying to manipulate the market. But he added that one of the problems with HFT is that it is sometimes misunderstood.

"It covers a lot of different strategies with a very broad brushstroke. You think of a lot of different strategies that are being employed," Sauter said.

Regulation National Market System, with its crown jewel trade-through rule, requires traders to "arbitrage" different venues and get customers the best price available.

That was an attempt to knit together fragmented markets, he added.

Reg NMS, Sauter believes, is not effective unless traders are going to various venues, looking for the best values. "And all of those various players and venues have contributed to make it a better marketplace than it was 20 years ago," he contended.


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