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High-Frequency Traders Strike Back
Traders Magazine Online News, September 22, 2009
High-frequency trading firms are under fire. They've been criticized in recent months by U.S. senators, financial bloggers and the press. The Securities and Exchange Commission has said it's undertaking a review of these firms and their role in the market.
Rich Gorelick, RGM Advisors
Now some of these firms, which previously shunned the spotlight, are fighting back. They're explaining what they do and how they do it. And they're explaining why they shouldn't have such a bad rap, even if they represent more than two-thirds of the industry's volume.
To be sure, that rap is bad. Richard Gorelick, co-founder and chief executive of RGM Advisors, a high-frequency trading firm based in Austin, Texas, offered up a definition of high-frequency trading based on media reports over the past few months. High-frequency trading firms, he said at a conference in New York last Wednesday, wield "an unfair, highly profitable and socially useless trading strategy implemented by highly secretive and unregulated traders using computers to compete with retail investors, manipulate markets and front-run flash orders, causing volatility in the financial markets and creating systemic risk."
That definition elicited hoots and a round of applause. The audience of nearly 200 people, including individuals from high-frequency trading firms, brokerage executives, traders and industry onlookers, were attendees at a half-day conference on high-frequency trading sponsored by financial-services research firm Aite Group.
After the wayward definition, Gorelick offered up his version of a fair description. High-frequency firms, he said, employ a "wide variety of highly competitive, low-margin trading strategies that are implemented by professional market intermediaries who have invested heavily in technology, that have the effect of making the markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors."
That definition, of course, might irk some market watchers. It could be seen as a self-serving description that highlights liquidity provision and price discovery, without acknowledging those strategies designed to uncover block orders or profit from informational disparities that exist in the structure of the market. Those are also legitimate and legal trading strategies, but they are not strategies primed to engender gratitude among buysiders. The definition also ignores those strategies that broker-dealers try to foil through painstaking execution strategies and anti-gaming efforts.
Still, the purpose of the panel was to explain the murky, opaque and secretive world of high-frequency trading firms. And the panelists did just that.
Matt Cushman, a managing director in quantitative strategies in the electronic trading group at Knight Equity Markets, described some of the characteristics of high-frequency trading firms. Typically, he said, high-frequency shops have a high portfolio turnover. Their trading strategies tend to be coupled with their execution strategies, and they micromanage the execution of orders. The firms are also usually very sensitive to latency in routing orders, receiving cancellations from market centers and getting market data from exchanges. For these firms, the order generation is done by algorithms.
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