The TradeTech conference has returned to its home in Paris, and proven a hotbed of discussion for traders and technologists alike.
TradeTech 2014 opened under the shadow of Michael Lewis's latest book 'Flash boys' which launched on 31 March 2014 and argues that the electronic equity market is rigged. The book is an examination - in some cases post mortem - of high frequency trading practices in the US, it explains how the use of technology facilitates the front running of big pension and insurance funds' orders in the stock market.
The front running is legal in this instance as it is not conducted by the fund managers' brokers, who hold privileged information, but by the high-frequency trading (HFT) clients of those brokers. HFT firms receive data on the fund managers' trades so fast, that they know where and when an order will be placed, then buy or sell the stock ahead of the fund in order to make an incremental profit. By trading at high frequency and high volume, these strategies deliver enormous profits - a single example in the book offers US$1 billion a year.
For the participants of TradeTech, the traders who try to minimise the costs that funds incur when they buy or sell stock, these revelations are not entirely new; however the event is a chance to discuss how they can use technology to avoid this unwelcome, unofficial tax.
Matt Lyons, CFA, senior vice president, global trading manager, Capital Group, gave the opening address with 'The trader’s trilemma: navigating a liquidity crunch, regulatory complexity and downwards pressure on costs'. He said that his firm had been using technology to overcome the reluctance to trade that stemmed from a lack of knowedge about counterparties.
"The rational choice and the natural propensity of traders on both sides of a trade is to remain anonymous," he said. "We try to find ways to get over this by allowing traders to identify the sources of indications of interest, so they know if ti is natural order flow - from a broker trading on behalf of a client or unwinding risk - and which order is coming from which increases the probability of the trader picking up the phone."
The panel discussion that followed; ‘The quest for liquidity: how can the market achieve stable, bright liquidity in equities?’ expanded further upon the point of transparency. Fabien Oreve, global head of dealing, Candriam Investors Group, said that there were reasons to be optimistic and positive about the impact of automation in trading.
“We must remember that the competition introduced by fragmentation has reduced explicit trading costs, and that there has been a significant offering of trading algorithms into the market, and so the buy-side has gained much productivity,” he said.
However he also noted that fragmentation created a challenge as average trade sizes had dropped as a result, making it harder to trade blocks of stock, and it also made trading performance harder to measure.
Rob Boardman, CEO of agency broker ITG Europe made the case for transaction cost analysis (TCA) tools providing excellent support for asset managers who were struggling with these challenges.
“They are a great part of the toolkit,” he said. “We have seen through performance analysis that implementation shortfall costs for trading have fallen continuously as a result of the market becoming more efficient.”
This advocacy of the electronic trading environment was largely supported by the buy-side traders present, however they were cautious about the way that the intended purpose of trading technology had in parts been subverted by the sell-side and market operators.
Speaking on the panel ‘How will trading in the dark evolve post-MiFIR?’, Saurabh Srivastava, global head of electronic trading at asset manager Invesco, said that the electronic crossing networks, or dark pools, that brokers offered had become accessible for many types of traders, rather than those purely trying to trade blocks.
“It became more cost efficient to trade other types of orders on dark pools, which saved brokers the costs of routing orders out to other exchanges; that meant that there were other order types trading on dark pools,” he said. “Is that a bad thing? I think it is an excellent question to ask.”
Chair for the panel Danielle Ballardie, head of cash markets and deputy head of markets and global sales, Euronext, asked the participants if IEX, the exchange that is mentioned as a suitable solution to the problem of exposure to HFT orders in ‘Flash Boys’, was needed in Europe.
Srivastava said, “I am interested in the mechanics of how the exchange would work… but yes we should have it in Europe.”
Michael Seigne, head of electronic trading for Europe at broker Goldman Sachs also voiced caution about diving in too fast.
“We have got to see how it plays out in US first of all. There is a very different market structure in the US compared to Europe,” he said.
Moving away from the days theme, a debate fielding the motion that ‘High touch trading in less liquid stock is the only future of trading’ was held between Joof Verhees, board member, Kempen & Co, and David Miller, head of EMEA trading, at Invesco Perpetual who were supporting the motion, and Duncan Higgins, managing director, Head of Electronic Sales, ITG and Martin Ekers head of trading at Northern Trust, who were against it. The motion was denied by an audience vote – although the counting proved very close – but Higgins and Ekers successfully argued that technology-based trading delivered efficiency and reduced risk of information leakage.
The use of human versus electronic trading was debated further by a panel discussion ‘Integrated high & low-touch services as one stop shop: is the future of the broker service model?’
Haroen Basarat, senior equity trader at APG Asset Management explained that his firm had been using the services of two brokers who were able to offer trading at both high and low touch across asset classes, primarily FX and equities.
To a question from the audience about the risk of information leakage based upon such a large amount of trading activity being placed through a single channel, he said simply, “There can be no room for error. None at all.”
Low-latency technology, which enables HFT firms to trade ahead of the asset managers’ whose orders they have tracked is typically not used by long-only buy-side firms, however the story exposed by Michael Lewis’s book had made some reconsider their position.
David Miller, head of EMEA Trading at asset manager Invesco Perpetual opened the panel discussion ‘The final frontier. When will speed reach diminishing returns?’ by saying, “When we started talking about this topic before the event I didn’t think that low latency was something that we were that involved in, but having read the first half of 'Flash Boys' and having trusted my orders to brokers, as I will continue to do, then I have realised that perhaps it is something that we should get get more involved in.”
However he said that there would still be some time before asset managers began investing in the systems themselves.
Nils Agren, managing principal, Verizon Enterprise Solutions said that one firm buying better technology was "the very nature of capitalism."
"However making sure that market participants receive market data at the same time is the responsibility of the exchange" he said.