Cameron Smith, President, Quantlab
Automated Trader talks to Bruce Eames, co-founder and CEO, and Cameron Smith, president, about the maturing HFT industry in an era of regulatory scrutiny.
Automated Trader: What kind of operation is Quantlab?
Cameron Smith: Definitions are always hard but we turn our portfolio over a little bit each day, so we probably would be in most people's definition of high frequency trading even if that is not a term I like. I believe we are unique among so-called HFT firms because we came into this business trying to solve our own execution problems and did so in the relative isolation of Houston, Texas, without any preconceived notions of what to try. Given that, we had to base our approach solely on quantitative research. In comparison, many of our competitors came off the floors and developed trading strategies based on their experience from the pits.
AT: What asset classes do you trade, and in which markets?
CS: Equities and futures, FX, treasuries and equity options. Not all of those in every jurisdiction however. We trade essentially globally, where there is the potential to trade. So firms like ours are going to be active in North America, and then Europe, and then Asia. A bit in South America, Japan and Australia.
AT: Are you in other emerging markets?
CS: We generally are not. I assume several of our competitors are in a lot of those places. But those markets, like Hong Kong, India, South Korea, have huge transaction taxes or stamp duties on equities. So, even though some of those markets are quite large, they don't lend themselves to what I would call professional trading.
AT: Any new directions for Quantlab? Where do you see growth?
CS: We spent the last several years just improving what we do. What you see is a maturing of the market and a reduction in trading costs for investors, and a reduction in trading profits for professional traders. Rather than new directions, we have been focusing on getting better at what we already do.
There is a mythology that speed is central to success but the reality is that the quantitative predictive aspect is the key to success. Just trading fast doesn't make you any money if it is the wrong trade. You need to know when to trade and then execute that order as quickly as you can. When we look to the future, we are keeping an eye on Asia and at Dodd Frank which, through regulation, may create opportunities to trade things that have been traditionally traded on bank only venues.
AT: Like FX and fixed income?
CS: Yeah. It's ironic that Switzerland is saying we need key instruments to be traded on an electronic exchange with automated trading to avoid scandals like Libor. So, while we have all this criticism of automated trading in the US, the reality is automation creates an incredibly fair and efficient market.
When you start comparing asset classes, everyone is wringing their hands over equity markets and Michael Lewis writes a book about it, but there is a lot more notional value being traded in FX and fixed income and they are way behind in terms of fairness, best execution and execution costs.
So we look forward to having an opportunity to trade something like fixed income in Europe.
AT: Do you find barriers to entry for trading firms to be getting better or worse?
CS: Competition seems to be intensifying, that is why we spend a lot of money and a lot of time always tuning our technology and our quantitative part. Our trading systems from four years ago probably wouldn't do much today, so there is a constant need to improve and come up with new strategies and diversify. At the same time, it is more expensive for new firms to enter the market, at least on a global basis.