Buy-Side Order Management In Focus After Knight Capital Error

Advanced Trading: What can the buy side do to protect themselves from errant orders being fired off on their behalf by their broker, and the harmful market dislocations that can follow?

Tom Haldes, Head of Buy-Side Operations at Trading Technologies International: At the most basic level, a dislocated market is everyone holding related positions. So roughly half the time that means there are winners as well as losers. But they're not the kind of situations where most, if not all participants really want to be on either side because that's the result of an unanticipated, uncontrolled reaction. So what can they do?

This underscores the increasing importance of real-time monitoring of markets and the real-time monitoring of the buy-side's order. Over time you're going to see these events become pretty big drivers in terms of the buy side being less interested in handing off their orders for execution without total visibility during the lifetime of that execution, and waiting for the final fill to come back. They're going to want more control of their orders, including safeguards through the whole lifecycle. Especially the ones directly controlled by the sell side or the execution facilitators if they're trading through their broker.

Advanced Trading: Will the Knight Capital news have any impact on how the buy side uses risk management systems?

Haldes: Demand for risk management systems that are built outside of the scope of the application that's driving the orders I think, is going to become an even bigger factor. If I build the risk safeguards and you write the application -- if you've got a bug, there's a better chance I'll catch it than you. In previous lives, I'm aware of situations in buy-side firms where that was entirely handled by one application. We will probably see that go away over time.

Advanced Trading: Is the buy side being more proactive about building customized algos and not just depending on what's being sold off the shelf?

Haldes: Things like what we've been reading about, particularly with Knight, will probably force the hand of bigger AUMs. The $100 million guys probably can't do it. But I think it'll make reality come into focus for some of the larger shops that probably would prefer to focus on investing, portfolio management, and correlations of issues and performance, versus the mundane aspects of execution facilitation and expertise.

That's probably more of an art than a science. That's the sell side's secret sauce. It's very expensive to replicate that. Building something as simple as a good volume-weighted average price (VWAP) order is a major undertaking and it costs a lot of money. So I don't think necessarily that a lot of them are going to want to do it, but many will over time because of the concerns we're talking about here.

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