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Interview with Sal Arnuk, Themis Trading
In the second in our series of High Frequency Trading Interviews, we talk to Sal Arnuk, Co-Founder, Partner and Co-Head of Equity Trading at Themis Trading LLC, an agency trading firm specializing in US Equities for institutional investors. Prior to founding Themis, Sal ran an agency stock trading business at Smith Jacobs and Co, and before that he spent ten years with Instinet. He holds an MBA in Finance from NYU’s Stern School of Business and a Bachelor’s Degree in Finance from SUNY Binghamton University. A regular commentator on the subject of High Frequency Trading, Sal recently attended the SEC’s Market Structure Roundtable.
High Frequency Trading Review: Sal, how would you define high frequency trading?
Sal Arnuk: I actually don’t think it’s useful to lump everything into one bucket called high frequency trading. Everyone does it just because it makes for an easy categorization, but I guess you can call HFT any strategy that involves high speed execution of thousands of orders per second, or in a short time period. I don’t even want to handicap it by calling it thousands as some people can do a million.
But the point is, some of this activity that people call high frequency trading is positive and beneficial for the markets. I’ll give you a great example, statistical arbitrage. Where for example IBM is trading at one price in London and it’s trading at a different price on the New York Stock Exchange, a slightly different price on another exchange and its option is trading at a slightly different “out of whack” price level in the options market. So a statistical arbitrageur will capture that inefficiency and sell the market that is more expensive and buy the market that is cheaper, in the process earning a small profit for himself while tightening spreads and increasing liquidity, which are good things for nearly all investors.
HFTR: So you would see that particular aspect of high frequency trading beneficial, because it is increasing liquidity and removing inefficiencies in the market?
SA: In a non-predatory way. That is the key. What I described is an example of high frequency trading which is valuable and serves a purpose.
But there are predatory types of high frequency trading and frequently the terms used to describe the predatory aspects are “momentum ignition”, “footstep detection”, where shops have co-located advantages, i.e. high speed advantages, by renting space from the exchange so the exchanges are complicit in profiting, it’s part of their business model. They sell them the speed and they sell them the data feeds that make it very easy to infer institutional footsteps. When I say institutional, I mean pension managers, mutual funds, large hedge funds, retail investors.
HFTR: So do you mean that high frequency traders using these predatory types of practices get to see orders before the rest of the market and are able to take advantage of those institutional orders?
SA: No, in this data feed issue that I am talking about, they are able to tie back. Let me give you an example. Imagine you are a seller of Abbot Labs, a NYSE Stock (symbol ABT) and it’s trading roughly $47.60. Let’s say you are a seller at $47.60 for a very large UK pension fund. Let’s say you are the trader on that desk and you have two million shares to sell and you are selling stock anonymously in a machine at $47.60, two hundred shares, three hundred shares, a thousand shares, piecing it out.
Now imagine if a computer program is set up and has a written code using special data feeds from the exchanges that allows that program to actually infer and tie back each execution and figure out that someone over the last 18 minutes has sold 180,000 shares of Abbot Labs as low as 47.60 and even higher than that, but they wont go lower than 47.60. Would you agree that this is useful information? If you are a trader and if you knew there was a large seller, you would probably try to short stock ahead of that seller and then maybe buy it back cheaper. So this is useful information and this is the type of strategy that is just one type of predatory activity that we’ve seen in the marketplace. There are plenty of others.
HFTR: OK but the supporters of high frequency trading would say, well this is no different to what’s always happened on stock markets where you have specialists and dealers on the exchange floor for example, who see those big orders coming in and are able to infer what’s going on from the way the order is being executed. How is what’s happening now with the use of computers different to that, other than that things are faster?
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