Invesco equities trading head questions worth of high frequency traders

The global head of equities trading at Invesco, which has more than half a trillion US dollars invested in shares, has questioned the utility of high frequency trading, and said this practice and the fragmentation of liquidity pools has fundamentally changed the game for longer term investors.

Kevin Cronin says it is part of a manager’s “fiduciary duty to clients” to weigh up such factors when trading.

He says one “pays a lot more attention to the market structure now than you ever had to before. It is not as easy as expecting that this does not matter, if you give away a lot of alpha in the implementation part [of your strategy].”

Cronin’s words and views carry weight, not least because Invesco has more than $630bn at work for clients in equities.

As a longer term investor, Invesco and its more patient peers are increasingly surrounded by quick-fire traders sometimes micro-second transactions are responsible for up to 70% of daily market volume.

The phenomenon has drawn fire from regulators who are investigating its utility, and whether it is responsible for some sharp market falls since the 2008/2009 crisis.

The equities team at Invesco is constantly re-evaluating and retrospectively assessing the efficacy of its trading strategies, and its ability not to flag trading intentions to competitors, he says.

An increasing number of these are the machines at high frequency traders, aiming to predict and exploit others’ trading patterns.

Cronin is mindful of their potency to deplete alpha in his team’s strategies, and thus also the final return for clients.

But he also questions the value of some of the fast traders’ role in capital markets generally. Exchanges court them, no doubt mindful of rich commission they pay while providing up to 70% of daily US equity transaction volumes by some estimates.

Cronin says: “Regulators and others have to be sure all the elements they put in the market are there first and foremost for the benefits of long term investors…and whether in the US or Europe that they make markets efficient and effective and conducive to capital formation in the long term. Other virtuous things will come from that.”

He does not argue generally, nor has he claimed in testifying in Washington, that any type of trading should be legislated out of existence. Indeed, he advocates one of the most contentious kinds – short selling – and praises some statistical arbitrage, mean reversion approaches as aiding liquidity.

 

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