The rise of high frequency trading over the last few years has unleashed a war between large financial institutions and a certain breed of hedge fund that preys on them by using computers to identify and front-run banks’ trades.
For the most part, the hedge funds have been winning this war. And they have extracted a heavy economic toll. While most institutional traders consider themselves to be expert at keeping a low profile in the markets, they are often outgunned by certain hedge funds that use high-speed network connections and trading algorithms to decipher and disrupt institutional orders.
Several years ago Rich Steiner, head of market structure strategy at RBC, estimated that the asset manager executed only 60 percent of its orders at the desired price. It had to pay a higher price to execute the remaining 40 percent of its orders.
The electronic-trading team at RBC decided to fight back against the problem of “phantom” or “disappearing liquidity,” which they blamed on a subset of high frequency traders using “predatory” tactics. That is how they came up with THOR, a system to help clients such as institutional money managers combat predatory HFT strategies and complete trades at the desired price.....