Buy Side Embrace HFT

Terry Flanagan

Contrary to popular belief, institutions, hedge funds, and private equity shops have come to see high frequency shops as businesses.

As history may show, financial crises ensue and regulators react. The recent financial crisis of 2008-2009 was no different. The world’s most recent financial calamity brought upon an onslaught of market structure changes and drew open fire on some market participants, such as high-frequency traders (HFT). While regulators and perhaps other market participants, such as some traditional buy-side traders have come to resent HFT, others note that speed is here to stay, and have invested in the technique accordingly.

“There has been a lot of noise in the HFT space in the past four and five years, and the buy side is largely confused,” said Jonathan Kanterman, managing director of Institutional Asset Advisors, which represents alternative investment choices for traditional institutional investors, such as pensions, endowments, family offices and fund of funds.

Kanterman believes that HFTs have been wrongly attacked by the institutional buy side and rather should even be looked at as a potential investment since HFT is a “liquidity provider” here to stay, not a competitor.

“Buy-side firms think HFT is a hedge fund strategy when they’re really more a brokerage technique that focuses on the execution of a strategy. They’re not outright in a hedge fund wrapper as they raise equity intraday and clean it out at the end of the day. They don’t need capital versus a hedge fund that’s about gathering assets; they’re just businesses.”

While Kanterman agrees that the buy-side is rightfully aware of transparency issues surrounding HFT practices, and concerned about proprietary information leakage, he acknowledges that HFT, along with the general movement towards a more automated, electronic trading world has made life easier for institutional buy-side traders.

“It’s much easier to do large trades now whereas in the past we’d need to call up five brokers and allocate each of them a small portion of our order,” he told Markets Media. “That could have taken an hour or two, and now it takes less than a minute using trading models.”

As the world becomes more electronic, the role of the traditional brokerage may shift from that of order-matching to an “execution consultant,” according to Kanterman, who cited that sell-side market participants should expect their clients to ask for more reporting and analytics about post-execution trade order-routing.

“At the end of the day, the sell side exists because the buy-side gives them business, so they need to add value,” he noted.

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