High Frequency Trading Review


    Interview with Joe Gawronski, Rosenblatt Securities

    This week, Mike O’Hara talks to Joe Gawronski, President of Rosenblatt Securities, who will be presenting at the upcoming High Frequency Trading World events in London and New York.

    Joe Gawronski is the President of Rosenblatt Securities, an agency-only brokerage founded in 1979. In addition to its reputation as an innovator in the execution services arena, the firm has carved out a niche as one of the leading providers of analysis on global exchanges and market structure and investment banking services in the fin tech/capital markets space. Joe is formerly a securities lawyer with Sullivan & Cromwell, a Vice President in the equities division with Salomon Smith Barney and COO of Linx, a block trading ATS. He received his B.A. in Public and International Affairs at Princeton’s Woodrow Wilson School and his J.D. from Harvard Law School. He is an Allied Member of the NYSE, a member of the Advisory Boards of both the Journal of Trading and Wall Street & Technology magazine, a term member of the Council on Foreign Relations, and a member of NOIP.

    High Frequency Trading Review: The first question is the same question I ask everyone and that’s what’s your definition of high frequency trading?

    Joe Gawronski: That’s a very good question to start with because I think different people mean different things. People throw out figures like, “high frequency trading or algorithmic trading now accounts for X % of the market”– well what are you including in that definition? The term “algorithmic trading” can be used to mean the tools sell-side brokers distribute to clients and these institutions then use for order placement, such as VWAP and implementation shortfall algos. It’s not just high frequency trading, but pretty much all institutional trading, that is using automated trading techniques and algorithms to some extent to slice up their orders. So I think you’re wise to start with a definition of your terms.

    If you look specifically at high frequency trading, we divide it up into two categories for ease of categorization. One is electronic market making and the other is stat-arb.

    Stat-arb is where firms are really looking for short term anomalies, price inefficiencies, looking at relationships between instruments. So the classic example (which I guess I can no longer use because of what’s happened in the market but I’ll use it anyway!) is buy GM, short Ford.

    HFTR: Pairs trading, you mean?

    Joe: Yes, pairs trading or even cross-asset class trading, like the ETF versus the underlying, or the futures versus the underlying. Now the stat-arb players tend to be net takers of liquidity as opposed to providers of liquidity posting bids and offers.

    The second group of high frequency traders are the electronic market makers, which is the group people mostly are referring to when they talk about high frequency trading. They are the bigger of the two groups and the ones who are making two-sided markets. If they’re doing it right, then they’re capturing spread and exchange rebates and entering and exiting positions within microseconds, milliseconds or (worst case) seconds. Not only are they trying to end each day flat, but they really don’t want any significant long or short exposure to any instrument at any time if they can avoid it; whereas stat-arbs actually are taking a position and making a directional bet. They may buy Ford and short GM because they think the prices are going to converge or they think there’s something in the trade. They don’t tend to have the holding periods of big institutions who hold the stock for three years or a hedge fund for three months, but they may hold it for three weeks, they may hold it for three days, they may hold it for three hours. Electronic market makers don’t really want to be holding positions at all, never mind at the end of the day.

    These two groups aren’t mutually exclusive by the way and the groupings are over-simplications. There are some stat-arbs that will also be employing what looks like electronic market-making strategies and providing liquidity. But overall those are the two groups.

    HFTR: Are there any common threads between those two groups?

    Joe: Well, with both groups you have the automated entry of hundreds or even thousands of orders over a period measured in seconds, with mass use of cancel & replace, i.e. canceling orders and putting in new ones. They’re both very opportunistic. They both need very reliable low latency, high capacity systems, the electronic market making category even more so because they play a very ultra-low latency game.

    Some of the stat-arbs play more what I would call a low latency game. It doesn’t necessarily have to be the fastest, it just has to be fast enough. The other commonality is they make very little money per trade. We estimate that the average revenue per share traded is only between a tenth and one-twentieth of a penny.

    HFTR: So they have to trade in huge volumes to make it work?

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