Buy Side vs. HFT?

Terry Flanagan

High-frequency trading is not a clear negative for the markets, as it is often portrayed in the media, said Justin Schack, managing director at Rosenblatt Securities.

“HFT itself is not necessarily good or bad,” Schack told Markets Media. “The details of how it is done are different than what came before it, but the functions it serves have always existed in trading markets. It brings benefits as well as costs to the market, as have all forms of intermediation. I think it has been a net benefit.”

Schack cited data showing transaction costs declined during the period of HFT ascendancy. “People lose sight of the fact the previous generation of liquidity providers, the ones that dominated before HFT, were not necessarily out there doing God’s work,” Schack said. “The old Nasdaq dealers, for instance, were accused of colluding to keep spreads artificially wide.”

Buyside orders have always been fair game for competing market participants. “There’s nothing new about institutional orders moving markets,” Schack said. “Information about an institutional order can leak to anyone. It could be a market maker, another institutional investor, a prop shop or a day trader trying to sniff out a pattern for short-term profit. In the old days the pattern recognition software was between your ears. Now it’s in a computer, and it’s a lot more sophisticated.”

So while evidence shows buy-side trading outcomes in aggregate have improved over the years, Schack said the unsettling factor that “the market looks and feels a lot different than it used to.” Additionally, trading small- and mid-cap names has proven difficult in the new market structure, with wider spreads and liquidity constraints going against broader trends.

So how are buy-side institutions navigating the newly redrawn trading landscape and ensuring that good investment ideas translate into good investment returns? In Markets Media’s July-August magazine, we interviewed senior trading personnel at six large U.S. investment managers to find out.


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