CoLo Battle Bots: Old Style Institutional Managers Getting Killed

With tools that determine the extent of a latency issue between two points in the trading infrastructure, firms can start to tune their trading strategies based on these latency numbers, explained Adam Honoré, research director with Aite Group. "Part one of this is reducing your own latency, part two is gaming the latency that you anticipate others having and part three of this, if you are a liquidity provider, especially on the dark pool side, is that you might want to provide latency statistics to your users," he said. [1]

OK, enough is enough.  It’s time to stop playing silly games with the pension money and hospital endowments.

Big hat tip to SmartBrief.

MORE: This [2] sure sounds like Regulation in a Mess to me ;)

Most notably for equities, Regulation NMS, passed in 2005 by the Securities and Exchange Commission, detailed new rules to protect orders and create more access for all participants. With it, transaction costs declined and non-exchange trading venues became more accessible for high frequency hedge funds, proprietary Wall Street trading desks and market making firms.

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[1]: "Time for Tools: Finding and Removing the Slightest Delay", by Alexa Jaworski, Securities Industry News, August 17, 2009.

[2]: "High-Frequency Trading Debate Goes Well Beyond Stocks", by Geoffrey Rogow, Wall Street Journal, August 19, 2009.

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3 Comments for this entry

  1. twist says:
    August 19, 2009 at 9:37 PM

    John-

    I wonder if the outmoded concept of investing for the long term will ever come back? Trading that happens in the nanosecond- even if legal, seems a lot more like gambling than “investing” to me.

  2. Chuck Ponzi says:
    August 20, 2009 at 7:01 AM

    Twist,

    I’ll give my thoughts, but I’m sure John has his own.

    Buffet once said, markets in the short run are a voting mechanism, and in the long-run a weighing mechanism.

    In my view, investing is more like gambling. You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.

    Eventually, all of the players will level the playing field on nano-bots, and we’ll likely have either an internal war erupt to do so, or a 1987 style programmed crash to show for it. In the end, investing is really a lot about educated luck.

    Chuck Ponzi

  3. John M. says:
    August 20, 2009 at 7:42 AM

    Chuck,

    My feeling is this whole thing’s just evil, while Igor is just “confused.” ;)

    You may be more interested in the following, though. Merrin’s book is that he runs a buy-only Dark Pool. That is, he claims to help institutional investors buy large blocks of stock without getting killed by those predatory algorithms. If he stood as the 377th richest American a year ago through offering what is basically a protection service, there’s gotta be a need for it.

    “Seth Merrin Examines the Pros and Cons of High Frequency Trading: HFT adds a lot of liquidity, but institutions need to opt-in to that”, by Ivy Schmerken, AdvancedTrading, August 19, 2009.

    “The problem is with three-or-four of the major ECNs and exchanges offering flash orders, there’s no way for way to avoid it,” says Merrin, referring to The Nasdaq Stock Market, BATS Exchange and Direct Edge. (Two of the three, Nasdaq and BATS Exchange, have volunteered to stop the practice by Sept. 1st). “The entire market became toxic for institutions,” contended Merrin. Flash orders are not so bad for retail investors who have100 shares to buy or sell, but it’s the institution with a million-share order to buy that is affected worse. “Billions of shares are being shown to these third parties and they don’t know who they are and they certainly don’t know what they are investing in,” asserts Merrin.

    ………………………………
    (later) … obviously guys like this who are pushing the technology to its limits are going to start wiping out into the hay bails along the side of the track, likely sooner rather than later. In that last para he’s saying for investors who can’t keep up, don’t trade, but the big institutional investors really don’t have a choice. The teachers’ pension funds need some yield to keep up with the actuarial demands on payouts, for example.

    “Buy Side Trader Shares His Use of HFT”, by Cristina McEachern Gibbs, Advanced Trading, August 20, 2009.

    Karpman says his use of high frequency trading strategies are mostly around arbitrage situations. “We also recently have gone into sentiment trading, or analyzing news and reactions to the news,” he says. “All of the data is stored in a very fast algorithm and once a new piece of data or news comes in a decision is made in milliseconds on how to act on the news.”

    In other words, as soon as data hits it will trigger the algorithm and automatically shoot an execution order. “It’s the optimization of the whole process,” says Karpman.
    …

    For those that can’t keep up, Karpman says there are always other markets. “If you think certain markets are penetrated by big guys with smart machines then you can move on to other markets.”

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