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“Setting Up Protection from HFT Predation” - Benefits & Pensions Monitor

Article by Kelly Reynolds, Head Trader at Hillsdale Investment Management Inc.

While the majority of high frequency trader (HFT) activity in the market is deemed as positive by many participants (such as market making, cross asset/market arbitrage, and statistical arbitrage), there are strategies that exist which are believed to be ‘predatory’ in nature. 

To protect themselves, institutional investors should take steps. Here are some ways that they can protect themselves from HFT predation: 

• Require minimum size trades ‘in the dark’ before transacting, minimizing information leakage and preventing small trades from ‘gaming’ you. 

• Customize the minimum sizes your require ‘in the dark’ in order for the amounts to stay relevant across different securities. 

• When sending passive orders, take an active role in specifying marketplaces in order to maximize your fill potential, jumping ahead of HFT participants in many cases. 

• Strategically choose execution venues recognizing that marketplace fees are typically embedded in the commissions paid to the executing broker. 

• Route orders like ‘retail’ traders as much as possible to help mask your trading footprint.

• Executing brokers should be carefully selected based partly on their technological know-how, customization options, and general market structure savvy. 

• Closely monitor developments in the Canadian market micro-structure to ensure that you are aware of new marketplaces and order types that can be used to improve/preserve execution quality. 

• Actively engage with Canadian regulatory bodies to ensure that the best interests of you and your clients are considered in the formulation of market structure regulations. 

To view the full article, including examples of some HFT strategies deemed as ‘predatory’, please download a PDF copy using the link above.