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I struggle to feel bad for these institutional investors. These investors are mostly fund managers who make on the order of 1% of assets under management yearly

I struggle to feel bad for these institutional investors. These investors are mostly fund managers who make on the order of 1% of assets under management yearly... Arguably, their jobs are composed of two functions: decide on investment decisions, and execute on those decisions. Yet - they are unable to do their own analysis of execution quality. A simple determination of execution quality does not require a PhD in math - it requires comparing the price of execution to the market shortly after the execution occured (If it moved against you, you could argue there was "adverse selection"). I am not saying what Barclay's did is right. I just feel it says more about the inept behavior of institutional investors that they were not able to smell a rat earlier on. The article rightly points out that HFT drives dark pools. If an institutional investor didn't know that, I am very confused why we pay them so much money...

scrumper 12y ago
Who's money do you think they are managing?
- tptacek 12y ago
  I'm not sure how the answer to that question is relevant to the comment you're replying to.
  - scrumper 12y ago
    Parent "Struggle[s] to feel bad for institutional investors" as if this was a class of whiney rich people who's money was under threat. It's not of course; it's mutual funds and pension money - our money. Let me expand a bit: dark pools exist because of an asymmetry in the public markets caused by their fragmented structure. Those money mangers recognized that, so they sent flow to a place which was explicitly marketed as a tool to mitigate that asymmetry. Contrary to the parent's post, transaction cost analysis is not an especially exact science and the tools available to fund managers are not particularly helpful or well-integrated. Their sell-side partners are not overly invested in helping them either, since they have their own issues (intense cost pressure, declining flow, regulators everywhere...)
    - tptacek 12y ago
      No, that's a bit of spin you put on it. His point is that the people running money for the institutional investors are themselves highly sophisticated, and if a point so simple as "you need sell-side financial entities to make a stock trading exchange work" eluded them, there is a bigger problem than Barclays marketing; those firms are being run by incompetents. Later Sure! It's not controversial that Barclays marketing of the LX exchange was misleading. Nobody is sticking up for Barclays. But the important, subtle point is that the LX pool probably couldn't have worked the way Barclays claimed it could. It doesn't matter how they marketed it. Without market makers, with a collection of like-minded investors, it's hard to get action. So it's not that Barclays was somehow corrupted by HFT traders. It's that they were trying to lead-to-gold alchemy to sophisticated clients, who should have known that Barclays can't turn lead into gold.
      - scrumper 12y ago
        You are right, I responded to my interpretation. That being said, the trading desks on the buy side are, for the most part, not very sophisticated at all. They are dealing with the same evaporating liquidity as the sell side, but they have far less ability to manage it. They are utterly reliant on the tools their brokers offer - tools which are generally very good (algos, and dark pools). In this case they are guilty of naivety perhaps, but it's nativity born of desperation. Barclays did directly say, "no predatory flow." At some point, even on the street, you have to believe direct statements made by your counter parties. Later I'm enjoying this; I have to run to a meeting unfortunately. Sorry :)
        kasey_junk 12y ago
        The idea that the buy side is less sophisticated than the sell side (or the new breed of participant the HFTs) is plain false. Their whole value proposition (how they justify that 2 & 20 they charge) is that they are sophisticated players in the market that can deal with these complexities. For instance, I've written HFT software for a buy side firm. To put this into prospective, there are single buy side firms that are bigger than the entire HFT market making industry.

scrumper 12y ago

Who's money do you think they are managing?

tptacek 12y ago
I'm not sure how the answer to that question is relevant to the comment you're replying to.
- scrumper 12y ago
  Parent "Struggle[s] to feel bad for institutional investors" as if this was a class of whiney rich people who's money was under threat. It's not of course; it's mutual funds and pension money - our money. Let me expand a bit: dark pools exist because of an asymmetry in the public markets caused by their fragmented structure. Those money mangers recognized that, so they sent flow to a place which was explicitly marketed as a tool to mitigate that asymmetry. Contrary to the parent's post, transaction cost analysis is not an especially exact science and the tools available to fund managers are not particularly helpful or well-integrated. Their sell-side partners are not overly invested in helping them either, since they have their own issues (intense cost pressure, declining flow, regulators everywhere...)
  - tptacek 12y ago
    No, that's a bit of spin you put on it. His point is that the people running money for the institutional investors are themselves highly sophisticated, and if a point so simple as "you need sell-side financial entities to make a stock trading exchange work" eluded them, there is a bigger problem than Barclays marketing; those firms are being run by incompetents. Later Sure! It's not controversial that Barclays marketing of the LX exchange was misleading. Nobody is sticking up for Barclays. But the important, subtle point is that the LX pool probably couldn't have worked the way Barclays claimed it could. It doesn't matter how they marketed it. Without market makers, with a collection of like-minded investors, it's hard to get action. So it's not that Barclays was somehow corrupted by HFT traders. It's that they were trying to lead-to-gold alchemy to sophisticated clients, who should have known that Barclays can't turn lead into gold.
    - scrumper 12y ago
      You are right, I responded to my interpretation. That being said, the trading desks on the buy side are, for the most part, not very sophisticated at all. They are dealing with the same evaporating liquidity as the sell side, but they have far less ability to manage it. They are utterly reliant on the tools their brokers offer - tools which are generally very good (algos, and dark pools). In this case they are guilty of naivety perhaps, but it's nativity born of desperation. Barclays did directly say, "no predatory flow." At some point, even on the street, you have to believe direct statements made by your counter parties. Later I'm enjoying this; I have to run to a meeting unfortunately. Sorry :)
      - kasey_junk 12y ago
        The idea that the buy side is less sophisticated than the sell side (or the new breed of participant the HFTs) is plain false. Their whole value proposition (how they justify that 2 & 20 they charge) is that they are sophisticated players in the market that can deal with these complexities. For instance, I've written HFT software for a buy side firm. To put this into prospective, there are single buy side firms that are bigger than the entire HFT market making industry.