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The good side of high frequency trading
(Pictured: Mike Mendelson)
AQR Capital Management has come out in support of the often-maligned ‘high frequency trading’ because of the liquidity, and therefore additional efficiency, it provides to markets. The interesting thing is that AQR is not a provider of HFT strategies – simply a well-informed user of markets.
Michael Mendelson, a principal at AQR who oversees risk-parity strategies and some quantitative equity strategies, said last week that the controversy about HFT had taken the focus off the “real issue”, which was that there is a lot of systems risk in our market.
He said, in Sydney prior to AQR’s conference to mark its 10th anniversary in Australia, at which he spoke, that HFT was necessary in today’s market. The old, human-style, provision of liquidity, whereby brokers contact their largest clients and engage in various techniques for short or long-term trades, was much more expensive.
Australia and New Zealand represent AQR’s biggest client base outside of the US. It accounts for about A$17 billion of the firm’s total funds under management of about A$116 billion. The firm has five staff in Australia, led by Jeff Dunn. It has about 450 staff worldwide.
Mendelson, who joined AQR in New York from Goldman Sachs in 2005, said AQR had “no axe to grind” over HFT but believed it should speak its mind about the benefits.
“We benefit from HFT because we trade and we care about transaction costs,” he said. “We think HFT has been part of the efficiencies in the market which lower costs. It’s part of the evolution of the market.”
He said that a market maker was always necessary in every market and that HFT did not really move prices around, as some people claimed. “In fact, it probably reduces volatility slightly,” he said. “Individuals have been huge beneficiaries of this. Commissions are lower and bid/ask spreads have narrowed.”
Several of AQR’s principals are ex-Goldman, including co-founders Cliff Asness, the managing partner and CIO, David Kabiller, who tends to run the business side of operations, John Liew, who heads up global asset allocation, and Bob Krail. They formed AQR in 1998.
At last week’s conference, which provided an open forum for discussion of sell-side ethics on Wall Street Mendelson, who started the quantitative trading group on the broker side of Goldman, said that firm did not benefit from HFT to the tune that many people have speculated.
“HFT has been around for 20 years but no-one seemed to care about it until about 2009, after the crisis, when banks became very unpopular. People have said that Goldman made extraordinary amounts money out of HFT but that was greatly exaggerated.
