And it shows in his business, as 50% comes from futures compared to just 15% three years earlier, when most HFTs concentrated on equities and options.
"If you are showing a bid or an offer of size, the high-frequency strategies are digesting that and skewing the market, and you need to be cognizant of it. There are a lot of strategies that are looking for that information and moving the markets," DePetris adds.
Not everyone sees HFTs as a threat, though. "High-frequency traders benefit us," Geismar says. "We find ourselves, more often than not, on the other side of those trades, so we like to see more high-frequency traders. A lot of them are playing both sides of the market; they’re providing more liquidity to the marketplace."
Geismar says that because QIM’s pattern recognition approach is so unique, he doesn’t think their entries can be detected, but they still need to be careful because of their size. "For us, years ago we realized that we can’t execute as quickly as we would like. If we were managing $20 million instead of $5 billion, our execution style would be much different. There is inherent slippage with every additional dollar that you manage and with us at $5 billion now our most important goal with execution is to execute as quietly as possible. So we have to spread our trades out throughout the majority of the day."
Of course traders always have tried to mask their size, but the proliferation of HFTs has forced managers to vary their entries more often.
Paskewitz does not change his entry strategies all the time, but does look at factors besides size. "It is not like HFT where your half life is a few months. Some of the strategies haven’t been changed in years, but they get changed when and if they need it," he adds.
QIM has been successful in limiting their slippage despite their dramatic increase in money under management. "It is an ongoing battle, but we think over the years we have done a pretty good job of minimizing the amount of money we lose to slippage," Geismar says, while adding, "There is no real way to measure slippage because there is no way to know what the market would have done if you were not participating."
Paskewitz agrees that defining slippage is not a perfect science. "I look at the price right before we start trading and compare that to our average fill price and that is my definition of our slippage."
He adds that it is more of an issue, the shorter your time horizon. "You have to be more diligent the shorter-term you are trading, and in the spectrum we are shorter-term. I would say we have modest pressure compared to a high-frequency trader," he adds.
The more things change
Geismar is not the only one who does not view HFTs as a new and evil influence. Robert Moss, chairman and president of Ram Management Group, says, "The execution has become easier now because the markets are more transparent. The volume has to be placed on
While Moss acknowledges that pockets of illiquidity develop, he attributes it to traders not using limits and adds it isn’t anything new. "The markets can go into a vacuum. But that is not anything that wouldn’t happen on the trading floor either," he says.
Moss has the benefit of years of experience executing large sized orders on the trading floor. To him, HFTs are not some evil monolith attempting to ruin his day and make a living reverse engineering his program; they are simply traders doing electronically what traders always have tried to do, and that is to get an edge.