RBC Capital Markets is rolling out its first new product since hiring a team of high-frequency experts and staff last year. The payoff is a new smart order-routing technology designed to prevent institutional orders from getting beaten to liquidity by rapid-fire traders.
The smart order-routing technology, named THOR, is being billed to clients as an anti-gaming technology. The router looks to nullify the time advantage HFTs have over others. It does this by adjusting the routing speed of orders, so that each order in a stock reaches its destination at the same time as the others. The advantage to this strategy, at least on paper, is that multiple executions occur before HFTs are able to cancel their posted orders and run ahead.
THOR is said to be in use in the U.S. and is being beta tested in Canada, according to sources. The product’s status could not be confirmed because RBC Capital Markets declined to comment for this story. However, RBC discussed the new product in two general-circulation publications: The Globe and Mail of Toronto and WSJ.com.
Order routers work in two ways. First, they can work sequentially–by sending orders first to the trading venue with the best rebate, and so on. They can also "spray orders," as THOR does, by sending orders to multiple exchanges at the same time, regardless of rebate.
Several buyside traders gave the concept a thumbs-up, including Kelly Reynolds, director of trading at Toronto-based Hillsdale Investment Management, which manages $C500 million in equities. Reynolds’ desk has been beta testing THOR for two months. So far, she’s a believer in the product. "It’s real-time latency adjustment for orders," Reynolds said. "For what it does, I am very satisfied."
She said THOR provides an alternative to other brokers that route their orders based on economics–they send orders first to the exchanges or venues with the best rebates and then to others. This type of order routing often gets the attention of HFTs looking for trading patterns. RBC’s spray routing product looks to avoid a trading footprint. After all the orders are executed, THOR cancels all of the outstanding bids or offers immediately.
Using hyper-fast computers and trading strategies, HFTs have long been accused of sniffing out large institutional orders and executing small trades ahead of them.
However, Manoj Narang, chief executive at Tradeworx, a Red Bank, N.J.-based HFT, said firms like RBC are playing off the buyside’s misconception of HFTs.
"It [THOR] is a semi-clever idea, but I think it is mostly a marketing gimmick," Narang said. "It is based on a faulty premise–namely, that firms that post orders on the exchanges engage in manipulative practices."
Last April, Narang filed a brief with the SEC, disputing the buyside’s assertion that HFTs engage in manipulative practices. If HFTs were engaging in price manipulation, he said, THOR–which in his opinion more closely resembles an algorithm–is more likely to hurt investors than help them.
"The reason is, a slowed-down VWAP algo will be unable to capitalize on the same fast-moving microstructure signals that HFTs trade on," Narang said.
Gimmick or not, Cheryl Cargie, head trader at Ariel Capital Management in Chicago, said THOR sounds promising.
"On the surface, this sounds really good," Cargie said. "The buyside will try to do business with whatever it can if it minimizes the chance we’ll be picked off."
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