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“Gaming has been around forever – it’s just a part of trading,” said Chris Willox, Director of Trading, Fenimore Asset Management at a panel during this week’s TradeTech conference in New York City. “Is there more gaming now than before? Im not sure. Have things changed a lot from when there was a specialist system? Not really, it’s just gotten a whole lot faster.”
His sentiment was echoed by many traders this past week who all agreed that while gaming is certainly a problem they have to address, it’s not necessarily a new one, and it’s absolutely a part of the game of trading itself. What gaming is really all about is one party having an advantage over the other, creating an uneven playing field. While trading itself is a game, it’s supposed to be a fair one – and when it’s not, conflicts arise.
But some traders feel that there’s really no way around this “advantage,” that one side has in a trade.
“Trading is a game – it always has been a game,” said Amit Manwani, Managing Director, Global Head of Electronic Product, Nomura Securities International, Inc. “Advantage is inerent in the process of actual trading. Depending on which side you’re on you’ll either feel good about that or feel slighted.”
Gaming can focus just on the fundamental idea of advantage, or it can be broader. Owain Self, Global Head of Algorithmic Trading, UBS Investment Bank, said that gaming can have to do with the predictability of someone’s behavior, or can be expanded upon to include anti-adverse selection, etc. “When I say gaming, I mean everything,” said Self. “There’s still some bad algos out there.”
Which brings the discussion toward algos and high frequency trading. According to Willox, there are some people who think that HFT is evil, but those are the people trading on the same algo all day. “We tend to get a little bit lazy on the buy side,” he said. “You can’t use the same strategy all day long.” According to Self, the “HFT guy” is always going to be the first one in the queue in lit markets.
So what questions should you be asking about your algos?
- How is order placement of algos determined?
- What is the specific nature of these routing/order placement logics? Picking the right venues can make a huge difference
- How do you interact with dark pools? They have evolved over the years…it’s important to understand the differences
The challenge is to reconcile how/why gaming takes place to be able to counteract the ability to be gamed, said Joseph Wald, Managing Director, Knight Equity Markets, L.P.
“There’s a big difference between gaming and front-running,” he said. “You need to have the ability to be aware of your order flow. If you take a shotgun approach, by the time you get to number three you’ve given away too much information and opened up for gaming.”
If you enjoyed this article, check out these:
Traders of the lost Art…Bill Bell, Barclays, on the Evolution of Trading
Top 5, Top 4: The Top 5 financial stories of 2010 & the Sure-To-Be Top 4 of 2011
It’s Poll Time! What do you think about HFT?
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