SBP: Some buy-side participants would struggle with the extra data and so tag condensing would be necessary to cover the audit chain.
You mentioned the difficulties of being a small buy-side order in a block pool. There are few genuine buy-side only pools: the average execution size in internalization engines and dark multilateral trading facilities (MTFs) is sub-optimal for many. Frequently broker BCNs now have ELPs (HFTs) as market makers in the pool providing a wall of very small-sized committed risk for institutional orders, each execution is signal capture for the HFT ELP and a cost saving for the bank. If, as a buy-side, you have seen a marked decrease in execution size in your broker dark books and small size execution(s) up front, perhaps with adverse interval tick reversions – you should ask the question about HFT ELP in the pool – these executions provide ‘synthetic’ blocks, however they come with increased signal risk per child order thus cumulatively increasing costs across the total parent. As many buy-side firms have mentioned to me – “dark today is basically lit”.
BCNs are financially important to the sell-side for cost reduction and revenue generation. Tighter market volumes and commission pressure have forced brokers to change their BCN models. Those firms without a hedged MTF platform have likely wriggled during the organised trading facility (OTF) discussions by stretching underlying definitions of an OTF to facilitate BCN participants and liquidity into an OTF. This may have played an important role in the removal of the OTF category in equities.
It is encouraging to see MEP Markus Ferber aiming to support the end investor. RBC has long conducted extensive neutral in-depth research around HFT, discussing the issues with clients and regulators alike. One of the Ferber metrics is the message to trade ratio also recognized in the market abuse directive – the 250:1 number we believe should be tighter still to reduce the signal generation capabilities of HFT and volatility inducing stochastic resonations.
The final point I would like to address relates to those banks with extensive HFT client bases looking to offer HFT execution strategies to their institutional clients. Would banks really take ‘cutting edge’ strategies from one client base and pass them straight to another? Would this not just be a straight transfer of wealth? When HFT as a client provides heavy commercial benefits to banks on the corporate side, PB or post trade for example, the algorithms are likely to be distinctly second hand where decay is pronounced. Furthermore, high frequency traders would know how to trade against those algorithms. We know of HFT-type strategies posting at multiple venues where one execution is achieved and ‘fading’ or effectively making the remaining orders disappear – does this provide false perceptions of liquidity on order books?
Quantitative Trading:Sourcing Liquidity And Managing Momentum
