02.20.2013
By Terry Flanagan

Buy Side Ambivalent About Low Latency

Buy-side traders are ambivalent about the prospects of low-latency trading in Brazil and other places around the world.

While it opens up opportunities for deploying algorithmic and high-frequency trading strategies, some traders are concerned that it will lead to fragmentation of liquidity, which could create upheavals in market structure.

“A big part of our business on our trading desk is Latin American, particularly Brazil,” said Anthony Godonis, senior equity trader at Aberdeen Asset Management. “Brazil has a single exchange, with not a lot of high-frequency trading.”

Aberdeen, which manages $302 billion, packages its services into segregated and pooled products across borders.

The firm invests worldwide and follows a predominantly long-only approach, based on fundamentally sound investments. Its investment teams are based in the markets or regions in which they invest.

The impact of liquidity fragmentation brought on by high-frequency trading has made itself felt most notably in the U.S., “where the market has gone from being very clear and transparent to being difficult to navigate”, said Godonis. “It’s reached the point where you need to be a market regulatory specialist and a technology specialist in order to understand how dark pools work,” he added.

While spreads have tightened as a result of high-frequency trading, the ensuing fragmentation has made it more difficult to fill an order.

“Ten years ago you had to pay a large spread to buy two million shares of IBM,” said Godonis. “Now spreads are a half-penny wide, but it takes forever to get the trade done.”

New products—from exchange-traded funds to cross-listed commodities contracts—offer sources of inefficiencies for quantitative strategies, said Godonis. And as the implementation of the Puma multi-asset electronic trading platform is completed across BM&FBovespa markets in Brazil, the capacity for HFT strategies is set to expand as well.

In Brazil, regulators are weighing up whether to require the incumbent exchange, BM&FBovespa, to provide overseas competitors with access to its post-trade clearing services.

In North America, meanwhile, buy-side firms are taking advantage of electronic trading technology to access the Canadian market.

National Bank Financial (NBF), a subsidiary of the National Bank of Canada, has expanded its use of technology from Orc to provide global market participants with algorithmic execution and market access in the Canadian markets.

The technology “enables National Bank Financial to offer direct market access to its suite of Canadian intelligent and dynamic algorithms, to global investors”, said Michael Newallo, managing director, electronic trading, at National Bank Financial, in a statement.

NBF will provide global customers with trading tools, execution algorithms and direct market access to trade Canadian equities, options and futures. Participants may leverage NBF’s direct membership to all sources of Canadian liquidity in a cost effective and efficient manner to ensure best execution.

“Combining Orc’s technology with National Bank’s comprehensive research products, depth of knowledge, access to liquidity and expert trading advice in equities and options serves to secure our position as the leading Canadian execution provider on Orc’s ExNet,” said Newallo.

Robert Fotheringham, senior vice-president of trading for the Toronto Stock Exchange and the TSX Venture Exchange, said in a statement: “Investors around the world are increasingly looking to Canada to diversify away from markets where they have historically concentrated their holdings. They see Canada as a great alternative that offers diversification by geography and industry sector; they also have confidence in the Canadian dollar, our country’s fundamentals and the stability provided by the Canadian government.”

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