HIGH-FREQUENCY TRADING Europe’s buy-side play catch up with HFT Buy-side must get smarter to stop being disadvantaged by high-frequency strategies and stop unintended regulatory consequences

uy-side firms must make use of all the sophisticated trading tools avail- “The buy-side should be most worried Bable to them if they are to avoid be- about order anticipation strategies, ing picked off by high-frequency traders. This was the core message delivered by Lar- which seek to take advantage of ry Tabb, CEO and founder of consultancy TABB Group, who kicked off the Buy-Side large orders with the use of superior Focus Day at this year’s TradeTech. technology and algorithms.” TABB estimates that high-frequency trading in Europe is set to grow to 38% Larry Tabb, CEO and founder, TABB Group of nominal trading this year, from 29% in 2009. By comparison, high-frequency Another part of traders’ reluctance “Connections to dark venues must trading in the US accounted for 61% of for authorities and regulators to inter- only be done after an analysis of the order flow in 2009, but is expected to drop vene and curb high-frequency trading is strengths of the different business mod- to 56% in 2010. The high proportion of a growing awareness of the advantages it els on offer,” said Tabb. “While histori- high-frequency flow on both sides of the can provide to traditional long-only buy- cally there was some reticence from the Atlantic has been attributed to an increas- side houses. buy-side over the use of broker dark ingly automated trading landscape, with While most traders realise that high- pools, they have begun to realise that fragmentation of liquidity allowing arbi- frequency trading has increased instances they provide significant liquidity that trage strategies to thrive. of gaming and made it harder to find sig- can’t be ignored.” According to Tabb, regulators in both nificant size on displayed markets, Tabb Tabb also highlighted the need for the US and Europe, as well as buy-side noted that such strategies increase liquid- good order management systems and traders, should be most concerned about Larry Tabb was ‘beamed in’ as TradeTech had to rely on live video ity for blue-chip stocks, tighten spreads execution management systems to help high-frequency order anticipation and feeds from speakers affected by the travel disruption and act as a driver for all equity market aggregate internal orders from portfo- directional strategies, rather than elec- participants to improve their technology. lio managers and control external trad- tronic market making or arbitrage tactics directional high-frequency strategies, questioned by TABB, 83% were either ing flow respectively, a better variety that leverage co-location capabilities and but the buy-side should be most worried positive or indifferent towards the im- Protect your order of algorithmic trading tools and wider high-speed market data feeds. about order anticipation strategies, which pact of high-frequency trading on market flow connectivity to brokers and trading Directional high-frequency strategies, seek to take advantage of large orders structure and liquidity. To help the buy-side realise these advan- venues. such as momentum ignition, are used to with the use of superior technology and “The buy-side, in the US at least, are tages and protect themselves from mo- “It’s all about the battle of the trad- accumulate positions in stocks that trade algorithms,” said Tabb. learning how to trade within the new mar- mentum or order anticipation strategies, ing bots, with the institutional algo, that infrequently while pushing prices higher ket structure and have just got the sorts Tabb pointed to critical factors that need seeks to protect and prevent exposure or lower. When institutional traders no- Unintended of tools they need to manage the high- to be addressed. of the buy-side’s order flow, coming up tice the increased activity in these stocks consequences frequency environment,” said Tabb. “The Most importantly, these included dark against the high-frequency algo, which and start to trade them, the high-frequen- But despite harbouring concerns, recent real issue is that traders are worried that pool access and to help investors minimise is in most cases trying to provide liquid- cy trader will look to trade against them TABB research in the US showed that regulators and Congress will start mon- gaming and hide order flow that could ity,” said Tabb. “Institutional buy-side and glean profits. 84% of traders do not want the gov- keying around to try and dictate how the cause market impact, and good quality firms need good traders that realise this “The Securities and Exchange Com- ernment and regulators to intervene. markets should work, which could cause a transaction cost analysis to measure algo- and take advantage of all the options mission is primarily concerned about Furthermore, of the buy-side heads lot of unintended consequences.” rithmic performance. open to them.” ●

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THE TRADETech DAILY—London 2010 Issue 2—21 April 2010 page 4