High Frequency Trading Review


    Interview with Ari Burstein, Investment Company Institute

    In the latest in our series of High Frequency Trading interviews, we talk to Ari Burstein, Senior Counsel of the Securities Regulation – Capital Markets group of the Investment Company Institute (“ICI”).

    Mr. Burstein is responsible for securities regulation issues affecting investment companies and investment advisers, particularly trading, market structure and brokerage related issues.

    Mr. Burstein joined the ICI in October 1998. Previously, he was an attorney in the U.S. Securities and Exchange Commission’s Division of Investment Management from 1997-1998 and the Division of Market Regulation from 1992-1997.

    Mr. Burstein is a member of the NYSE’s Institutional Traders Advisory Committee, Nasdaq’s Quality of Markets Committee, and the National Organization of Investment Professionals.

    High Frequency Trading Review: Ari, what is your definition of high frequency trading?

    Ari Burstein: It is difficult to put a specific definition on high frequency trading per se, certainly for regulatory purposes. There are a number of different trading strategies that can be described as high frequency trading and a number of ways that high frequency trading firms can be organized. With that said, while there is no formal definition of high frequency trading, the SEC in its Concept Release on the US equity market structure noted several characteristics that are often attributed to high frequency trading firms.

    They listed five characteristics: the use of very high speed and sophisticated computer programs for generating, routing and executing orders; the use of co-location services; very short time frames for establishing and liquidating positions; the submission of numerous orders that are cancelled shortly after submission; and, maybe most importantly, ending the trading day in as close to a flat position as possible. I think that is a good place to start if you want to try to come up with characteristics that could define high frequency trading.

    It is also important to distinguish between long-term investors, such as funds, and professional traders, such as high frequency traders. The SEC has described long-term investors as market participants who provide capital investment and are willing to accept the risk of ownership in listed companies for an extended period of time. You can certainly put mutual funds in that category. Unlike long-term investors, professional traders such as high frequency traders generally try to establish and liquidate their positions in a much shorter time frame. Because of this, some high frequency traders have different interests than investors such as funds, who are concerned about the long term prospects of a company.

    HFTR: Now I understand the ICI is an organization that works in the interests of these long term funds and long term investors. So could you maybe run me through why high frequency trading is important to the ICI and what are some of the key issues as you see them?

    AB: As you mentioned, the ICI represents the registered investment company industry, i.e. mutual funds, ETFs, closed-end funds and UITs in the United States. The structure of the securities markets definitely has a significant impact on ICI members. ICI members are investors of over 11 trillion dollars of assets, and at the end of 2009, held 28% of the value of publicly traded U.S. equity outstanding. It is also important to note that ICI members invest on behalf of over 90 million shareholders. Because of this, our members obviously have a strong interest in ensuring that the U.S. securities markets are transparent and efficient. Depending on what estimates you look at, high frequency trading in the U.S. equity markets account for at least 50% of the total market volume and most estimates bring this number up to 60% to 70% of the total market volume.

    So, given the importance of efficient and effective markets to funds and their shareholders, I think any market participant that represents such a large portion of the total market volume is important to the ICI and its members.

    It is also important to note (because there has been some confusion) that the ICI doesn’t object to high frequency trading per se. Arguably high frequency trading brings several benefits to the markets and to investors such as funds in those markets, including liquidity, tightening spreads and playing the role of the new market makers.

    At the same time there are some potential concerns that we’ve noted around high frequency trading. These include the potential for gaming through the use of their high speed computer programs and the submission of numerous orders that are cancelled shortly after submission. Of particular concern to our members are some of the strategies that are employed by high frequency traders (as well as other market participants) that are often designed to detect the trading of large blocks of securities by funds and to trade either with or ahead of those blocks.

    HFTR: So do you think there is enough transparency around what high frequency traders are doing?

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