Buy Side and HFT: A Zero Sum Game?
Buy side traders are ambivalent about the impact of automated trading. On the one hand, it’s helped to drive down trading costs by injecting liquidity from high-speed market makers, but on the other hand, it’s exacerbated concerns about a high-tech arms race within the trading community, especially as it relates to high-frequency trading.
“Market structure has become so complicated. It is such mental acrobatics, and it has become extremely politicized,” Diana Avigdor, vice president, portfolio manager and head of trading at Barometer Capital Management, a Toronto-based asset manager, told Markets Media. “It feels to me now like every interest group is lobbying the regulators. I commend the regulators for trying to make sense of something that has gone to another extreme over the last 20 years. In other words, 20, 25 years ago there was one set of bad behavior, now there is another set of bad behavior and it’s become incredibly complicated and granular.”
Given the complexity of the market, it has created in the full service dealer less appetite for risk to make markets.
“The current market structure creates less appetite for risk taking, namely block trading,” said Avigdor. “So DMA desks have to some extent cannibalized the dealer’s own cash business, as everyone attempts to stay away from making a call at a price, and TCA further exacerbates the lack of incentive to stand out. Everyone would rather get some kind of average price, rather than trade a block, so as not to stray too far away from benchmarks. It’s like closet indexing, trader style.”
Barometer Capital is a very active asset manager. From a portfolio management perspective, it’s fundamental and will buy relative strength and sell relative weakness.
“We’re extremely disciplined, we have stop-losses on every one of our positions. We will let the market dictate to us where we should be,” Avigdor said. “We will never pick bottoms and never have targets of where to sell because we will let our winners run. We will attempt to take very small losses by adhering to disciplined stop-losses which take the emotion out of investing.”
Portfolio management and trading are two sides of the same coin. “On one side you have portfolio management, where if you do the best you can for your client, they’ll have a great return and increase your asset base,” Avigdor said. “On the trading side, we have a fiduciary duty, we have operational concerns, we have compliance processes and that’s important.”
For HFTs, saving nanoseconds and nanopennies is their forte, but the ones who ought to be most concerned are the full-service desks at the dealers, not the buy side, says Avigdor.
“Is it the best use of my time to try and constantly get ahead of this mental acrobatics?” she said. “I feel that a lot of the gains that I have made in saving on commissions and spreads, for example, came at the expense of the dealer community. They lost, it is a zero sum game. Me not having to pay twelve and a half cents spread, means that somebody didn’t make that spread. Me not having to pay 6 cents a share commission, instead of 2 cents commission, means I saved 4 cents but somebody lost 4 cents.”
Feature image via Rawpixe/Dollar Photo Stock
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