Is the Buy Side Sacrificing Speed to Save Money?

Advanced Trading interviewed Robert Iati of Tabb Group as part of a broader story on whether traditional asset management firms were looking for speedier access to markets and data centers. The full version of this story will appear in our August digital issue.

Advanced Trading: Are long-only buy-side firms looking for high-speed access to exchanges and data centers? Is that a trend?

Robert Iati, Partner and Global Head of Consulting at Tabb Group:

I don’t think that’s necessarily the case. We’ve done a good deal of research on this and we’ve been following it for several years. We see to some extent that we’ve reached a bit of a point of resistance when it comes to colocation, in particular on price. It seems that the current market structure and market environment has led us into a situation where for any firm but those that are making a significant part of their business from high-frequency trading, the opposite is true.

Many more firms we’re seeing now seem to be willing to sacrifice or compromise a little bit on speed with the hope of saving some money. And that’s directly related to the economy just being weak and it being less favorable. The market is being less favorable overall for high-frequency trading. Volatility came down a while ago and it’s been pretty steady, volumes are generally down. Some of those opportunities aren’t where they were.

So we’ve seen more of that. That doesn’t mean that there aren’t a handful of firms that are maybe changing a bit. But we haven’t seen any kind of momentum there.

Advanced Trading: Does being colocated help prevent information leakage?

Iati: To the extent that your activities are a little slower, it could. I’ve never looked at it that way so my gut is to say no. But there may be circumstances where you could see some leakage because there’s more of an opportunity to reverse engineer what any given firm might be doing. But I can’t say I’ve had many conversations or heard many people express it that way.

Advanced Trading: Is the traditional asset management community looking to add a quant element to their strategies at this point? Is that a trend?

Iati: It’s a case by case basis. I don’t know that you can say there’s more momentum one way or another. All of these firms are going to be looking for where the opportunity is tomorrow and where it was yesterday. And sometimes they don’t align. If my strategy as an asset manager is one that now seems to be one where there’s not going to be much opportunity in the next few years, then I need to change that strategy. Whatever that strategy is, if it looks like it’s not going to work going forward I need to make adjustments. It certainly could be some of those adjustments make things more quantitative, but then I’ve got to deal with the charter of my fund and I’ve got to be true to the investors in my prospectus. So it’s not as simple as, ok, I’m going to change. It’s a matter of how readily can I change and not go against the rules that I played by.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio