High Frequency Trading Review


    An Interview with Mark Gorton

     In this interview for the HFT Review, Mike O’Hara talks to Mark Gorton, Managing Director and Founder of Tower Research Capital LLC, a proprietary trading firm based in New York that specializes in quantitative trading and investment strategies.

    HFTR: Mark, welcome to the HFT Review. Can we start with you telling us a little about your background?

    MG: Sure. I originally studied electrical engineering at Yale and then later got a Masters at Stanford. I worked as an electrical engineer for Martin Marietta for two years, doing digital signal processing and speech recognition work. After that, I went to Harvard Business School then I got a job at First Boston (which became Credit Suisse First Boston and eventually Credit Suisse) where I worked in the fixed income proprietary trading group. I left in 1998 to form Tower Research Capital. We have now been in business 14 years and we have 275 people worldwide.

    HFTR: And Tower Research Capital’s main business is proprietary high frequency trading, correct?

    MG: We do mostly high frequency trading, yes. We have a lot of different trading groups, different trading styles but they’re all quantitative in nature and the vast majority of what we do is automated.

    HFTR: Which markets do you mainly trade?

    MG: Most of the major electronic markets around the world. We trade equities, futures, foreign exchange and fixed income. Not so much options, we do trade some but we’re not really an options trading house. So it’s balanced across asset classes and across geographies.

    HFTR: Are there any particular markets where your style of trading is more successful? And are there any that you steer clear of?

    MG: The basic fair electronic markets are what work well for us. Obviously non-electronic markets are less suited to what we do and we generally like more liquidity, more turnover, those sorts of things.

    HFTR: What is your typical holding period?

    MG: We have some very short holding periods of a few seconds up to a few days for some of our trading strategies. But the majority is definitely intra-day.

    HFTR: What kind of strategies do you typically run? Arbitrage? Market-making? Trend-following?

    MG: We really do a lot of everything. We add liquidity and we remove liquidity. The common thread around what we do is we have a very numerical statistical data-crunching approach to how we build our trading models.

    HFTR: HFT is obviously a very controversial topic these days and proprietary HFT firms have been taking a lot of flak. So can you explain how you think high frequency trading benefits the wider investment community?

    MG: Well first of all there’s been a big change in how markets work in the past decade. They’ve gone from manual markets where you had guys trading on the floor of an exchange to electronic markets where prices are disseminated over telecom lines. The role of the middleman, which used to be played by specialists on the New York Stock Exchange or locals on the floor of the futures exchanges, has now shifted to electronic traders. Things have changed and the markets are different to how they were a decade ago. They actually work better for end investors but they are different. And if you’re not a market expert, it’s very easy to be afraid of that change and to not understand what’s happening.

    A lot of the criticisms about high frequency trading stem from the fact that high frequency traders are not long term investors, and the idea that there is something wrong with that. While it’s absolutely true that high frequency trading is not about holding stocks for a long time and not about fundamental investing, what a lot of people fail to realize is there’s always been this class of short-term traders, these middlemen who act to provide liquidity, to knit together liquidity and markets. High frequency traders have basically stepped into that role and we actually do that much more efficiently than before. Spreads are tighter and it’s cheaper than ever to trade for average investors, whether they’re institutional investors or small investors, there are big net savings to the general public.

    You even have Vanguard saying that because of the reduced transaction costs, average mutual fund investors are saving about 50 basis points a year, which adds up to about 30% over the course of their investing life. If people are going to retire with about 30% more in their retirement account, that’s an enormous benefit to the public. But most people don’t understand that, which really is a shame because if they understood how much cheaper and more efficient it was to trade now, they would be a lot happier.

    Some people of course do understand it, but a lot of the old guard who were used to doing these big block trades where they could just call up Goldman Sachs and trade a million shares of IBM or something like that, they don’t like the changes because it’s a different process now. It’s not that people can’t trade a million shares of IBM, they can – and it’s actually way cheaper than before – but the way you do it now is to put it in an execution algorithm. You have a whole class of people who are having a hard time adjusting to that because to a large extent, the automation is replacing jobs for those people on Wall Street and some of them are very vocal in their opposition to the new market structure.

    HFTR: So are there any criticisms leveled at HFT that you think are valid?

    MG: Sure, absolutely….

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