Buyside Welcomes Credit Suisse's New ECN With HFT Safeguards
Traders Magazine Online News, January 20, 2011
When Credit Suisse's new ECN debuts in March, it should find a ready group of customers. Apparently, the buyside believes there's room in the crowded field of trading destinations for another market center that caters specifically to long-term investors.
Ted Oberhaus, Lord Abbett
Credit Suisse's ECN, called Light Pool, will come with a message: No opportunistic traders allowed. This means that firms with short-term alpha strategies--such as many high-frequency traders--won't be welcome in the ECN.
And that suits Ted Oberhaus, equity trading director at the asset management firm Lord Abbett, just fine. He is among several traders on the buyside with whom Traders Magazine spoke who are eager to check out Light Pool and get under the hood to give it a test drive. In theory, Oberhaus said, building a market center that prevents HFTs from stepping between the negotiations of two buyside traders is a good idea.
"Anytime you pull together just long-only investors, it's great for asset accumulation in the asset manager's business model," Oberhaus said. "So, conceptually, it works for me."
One large asset manager said he also wants to hear more. He's scheduled to meet with Credit Suisse representatives soon to learn about how Light Pool works. He said he definitely sees a need for what Credit Suisse says the product offers.
Dan Mathisson, Credit Suisse
Light Pool is currently in beta testing. Credit Suisse's plan to launch the ECN was first reported in a story last week by Bloomberg News.
Those employing high-frequency trading strategies are welcome in Light Pool, too, so long as they behave themselves accordingly, said Dan Mathisson, head of Advanced Execution Services at Credit Suisse. At its simplest, this means they can't pick off other investors' orders.
"If a trader is picking off other clients, then they'll get classified an opportunist, and they can no longer trade on the system," Mathisson said.
Credit Suisse will use an objective quantitative formula to determine the intent of those who use Light Pool. Once a customer logs 500 fills, AES will measure the short-term alpha--a calculation of excess return--from every fill. Clients found to have short-term alpha are labeled "opportunistic." Clients who have flow that appears to be information-free, and that doesn't display gaming behavior, get classified as "contributory" and may trade uninhibitedly, Mathisson said.
If a client is classified as opportunistic, he cannot have a direct connection or send orders anymore directly to Light Pool, Mathisson said. And because a displayed order under Regulation NMS must be accessible, the opportunistic trader would have to access the quote via order delivery from one of the exchanges. That adds delays and costs, Mathisson added.
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