senior managing director and head of product development, Fox River Execution, SunGard's capital markets business


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By Paul Daley, senior managing director, SunGard’s global trading business

In sports it has often been said that the best defense is a good offense. The same is true of trading, particularly in a market increasingly dominated by high frequency trading. While it can be effective to have a strong defense (anti-gaming technology) we feel it is more effective to have a strong offense (gaming technology).

Anti-gaming technology has often been described as a monitoring function. Fills are analyzed and if predatory behavior is detected actions are taken to prevent further predatory behavior. This “close barn doors after lambs have departed” approach to trading will only preserve any remaining lambs. The trades already executed are the sacrificial lambs. Anti-gaming also takes away access to liquidity that may actually be value added if it is interacted with intelligently.

Gaming technology involves embedding price opinions and alpha predictions into the algorithms so that all liquidity can be assessed and accessed based on the tradeoff between the cost of doing a trade and the expected benefit. This allows greater access to more pools of liquidity while still protecting an order from negative outcomes. It is no coincidence that by going on the offensive against predatory trading behavior Fox River’s algorithms have been persistently ranked #1 by third party transaction cost analysis firms.

The reality is that high frequency trading will continue to grow in importance. When exchanges went to a for profit model this die was cast. The maker/taker pricing model makes high frequency traders the exchanges most valuable customers both through an increase in trading fees and an increase in market data that gets generated. As exchanges get a large percentage of their income from market data this becomes an important source of revenue growth. Therefore, the safest assumption for the future is that high frequency trading will grow and need to be interacted with rather than avoided and gaming technology will replace anti-gaming as the first line of defense.

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