TAKING THE HIGH-TECH ROAD.
How difficult are today’s markets to trade in?
One of the problems today is that people had become too used to benign markets and had forgotten how to adapt to changing conditions. Today, the ride has become a lot harder due to rapidly evolving microstructure changes over short periods of time. I don’t think markets are volatile but that people are not engaging with them in a way that reflects it. The biggest hurdle cost for traders is how aggressive to be. As spreads have dropped, trade sizes have come down which effectively means that you need to lengthen your execution window or decrease your aggression so as not to show market participants what you are doing.
What has Marshall Wace done to keep its edge?
I think today there is a lot of gain from spending money on technology. Firms can differentiate themselves with the right, scalable platform and intellectual property. We believe that you have to be innovative, constantly evolving and investing significant amounts of money into building and enhancing products and tools. We build everything ourselves, back-test it and make our own impact assessments. We have invested in our trading platform and infrastructure which all of our funds, including our Trade Optimised Portfolio System, are able to leverage. It enables us to trade efficiently across global markets in real time and capture more alpha for our funds.
As for TCA, we have built our own systems because we can better standardise methodologies and understand each assumption and calculation utilised. We also find it difficult to integrate our trading system with independent TCA vendors to capture all necessary information to provide us with the depth of analysis and flexibility that we require. Our goal is to ensure that we have cutting edge technology in order to optimise the execution process and to provide an end-to-end service that is seamless for the portfolio managers and investors.
How do you see the hedge fund industry evolving?
If I had to guess I would think that the big funds will get bigger and the small ones will continue to be niche. It will be those in the middle that will be impacted because the running cost is high and regulation will only increase that. Firms will need the economies of scale in order to survive, unless they have a nice product. I think the opportunities for a two man hedge fund with $50m are limited.
What has been the impact of the reams of regulation?
There has been a great deal of regulation over the past few years but I am not sure that the markets have become any more efficient because of it. For example, market data as well as exchange fees are still too high. There is also a lot of talk about high frequency traders but I think looking ahead they will struggle and need to move up the value chain if they want to survive.
How important is speed?
I don’t think differentiation can be based on who has the fastest computer anymore. It is pretty much a level playing field. There used to be a greater difference but that has been virtually eliminated and there is a limit to what can be achieved in relation to marginal speed benefit implementations. Upgrading hardware is still relatively cheap and will continue to happen but I think we have reached the point where the alpha forecasts being encoded aren’t granular enough to take advantage of the speed with which computers can execute strategies. The costs of marginal speed are high relative to revenue. I think people will continue to maintain and try and improve things where it makes sense, but I see the money they previously spent on hardware will over time, be spent on research.