21 November 2013
Prior to the event, MSc Finance and Investment students were set a group assignment which was designed to meet the needs of the investment community and in particular long term investors. The assignment was developed with input from CFA UK via Haig Bathgate, Chair of Scottish Committee, and other experienced charter holders in the UK and around the world. 66 students from more than 15 countries around the world stepped up to the challenge, producing and presenting reports that served a real, practical purpose.
Douglas Kyle, MSc Financial Investment student, gave a presentation of his group's findings on the effect of high frequency trading (HFT) on long-term investors. Taking into consideration liquidity, volatility and the operation, risk and cost, borne by investors he commented on the outlook for regulation, suggesting that the relationship between HFT and liquidity is perhaps not as strong as has been previously assumed. Though no regulation appears imminent in the UK, Douglas pointed toward all eyes being on Italy to gauge the success of the recently implemented tax.
Guest speaker, Ian Heslop, Head of Quant Strategies at Old Mutual Asset Management, outlined the perspective both as producer and consumer of systematic investing. His experience managing portfolios for a wide range of clients using quantitative processes since the 1990s made him ideally placed to present on HFT equity long-short. Ian was able to demonstrate that it is becoming harder to diversify and differentiate and that quantitative long-short investing provides a means for his clients to differentiate. Although this type of strategy requires high turnover, it does an important job for his clients by providing uncorrelated alpha i.e. return relative to a benchmark, regardless of market ups and downs.
Gbenga Ibikunle, representing the University of Edinburgh Business School on the event panel, commented that markets have never been more efficient since Eugene Fama introduced the efficient-market concept in the 1960s. Long term investors cannot afford to ignore HFTs, he warned, as a special type of ‘informed’ (predatory) traders come to the market not to trade with exogenous information but to elicit anticipated responses from traders. HFTs then capitalise on these to achieve alpha. GB gave examples of trading venues where HFTs can be penalised for using liquidity and rebated for providing liquidity, thus reducing predatory pressures.
Looking forward, long-term investors ignore HFT at their peril and risk missing out on the benefits of diversified high turnover strategies. HFTs are under pressure and subject to regulatory responses which are only starting to materialise.