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By Jacob Bunge Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- High-frequency stock traders said speed and liquidity remain the key drivers for their business, despite a high-profile price war between exchanges and other venues.
The algorithmic traders have become sought-after liquidity providers for exchanges on both sides of the Atlantic, as well as a new breed of electronic platforms competing for shrinking volumes.
NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) have introduced a raft of rebates and price changes directed at the segment as both fend off competition from rival exchanges and alternative electronic trading venues such as BATS Trading and Direct Edge ECN LLC.
The algo traders are, in many cases, viewed as de facto market makers, according to Stephen Ehrlich, chief executive of Lightspeed Trading LLC, a direct market access provider that serves many such firms.
But the No. 1 concern for these proprietary trading groups, Ehrlich said, is speed and liquidity. "Rebates are secondary," he said.
"An extra half a penny or 50 cents per thousand, which is the difference between Nasdaq and Arca, doesn't make anyone make a change," he said.
The presence of these trading groups has become more important to exchanges as traditional market makers dry up and institutions scale back trading. "They're the ones supplying most of the depth of the market," Ehrlich said.
To tap that liquidity, NYSE Euronext and Nasdaq OMX have tweaked trading fees and rebates to draw more of these shops to their markets.
Earlier this month, the New York Stock Exchange for the first time began paying rebates to liquidity providers on its market, adopting a practice in place for years at competing exchanges and electronic trading platforms.
It also raised fees for participants who are net takers of liquidity on the market and lower latency on the NYSE venue. The fee-rebate scheme was adjusted on the NYSE Arca electronic market as well.
Days later, Nasdaq OMX announced its own round of pricing changes, introducing new rebates and transaction fees on Nasdaq OMX BX, formerly the Boston Stock Exchange. The strategy, officials said at the time, is to boost market share.
While exchanges have declined to say how the fee shake-ups might affect their bottom lines, the moves are considered likely to depress revenue as exchanges focus on cost cutting to prop up profits in a time of slumping volume.
But for the high-frequency traders who stand to gain the most from these fee changes, speed of execution remains the No. 1 issue.
When deciding where to execute algorithm-generated trades, "latency and cost would be the two major factors, in that order," said Sean Hendelman, chief executive of T3Live LLC, a proprietary trading group also involved in trader education.
The New York Stock Exchange, NYSE Arca and Instinet LLC are the primary trading venues for T3Live's systematic trading, Hendelman said.
The firm also does technically based manual trading; for this business, Hendelman said the firm is mostly agnostic in terms of where trades get executed.
In terms of speed, Nasdaq OMX and BATS are seen as the low-latency leaders.
BATS, according to officials, has an average speed of 400 microseconds, or 400-millionths of a second, while Nasdaq OMX estimated its average between 200 and 400 microseconds. Nasdaq OMX is set to report fourth-quarter earnings Thursday.
NYSE Euronext's Arca platform comes in at about 700 microseconds, with the NYSE at 62 milliseconds, though the exchange recently announced plans to reduce that speed to 10 milliseconds or below. A millisecond is one-thousandth of a second.
Direct Edge's average speed is about 900 microseconds.
Fees do make a difference. "Obviously if Arca says it will be $3 to take liquidity and $2 to give liquidity back, you change your strategy," Hendelman said. And the firm's trading programs react when exchanges adjust fee structures in tandem, as NYSE Euronext and Nasdaq OMX did this month, or when one exchange's pricing is an outlier.
Trading groups' rise in prominence comes as the role of specialists has waned. NYSE Euronext last fall overhauled its market model, with specialists, historically the market makers for the exchange's open-outcry market, no longer getting the "first look" at electronic orders and being put on equal footing with so-called designated market makers, such as high-frequency prop traders, which are now able to execute such orders faster.
According to Ehrlich, such proprietary trading groups operate like hedge funds but don't take outside capital. Individual traders, often coming from sell-side firms' own prop trading desks, will recruit a handful of assistants to help trade their strategy, and generally manage $2 million to $5 million.
Ehrlich said 60% to 65% of Lightspeed clients' order volume goes to Nasdaq, mostly due to its speedy matching engine. About 15% goes to NYSE Arca and 10% to BATS Trading, with the rest split among other venues, he said. Lightspeed's customers determine where their orders go.
If BATS and Arca expand co-location services, it is likely more Lightspeed clients would direct business to those venues, Ehrlich said.
Ehrlich added that he sees the trading groups' influence continuing: As the trading floors at the New York Stock Exchange and elsewhere shrink, more traders are moving upstairs, with many ex-market makers getting into the act.
These shops are also attracting college students, with big investment banks no longer the employer of choice for newly minted MBAs. "Now they want to learn from these prop trading groups," Ehrlich said.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com
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Publié le 23 Février 2009 Copyright © 2009 Dowjones

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