In markets dominated by speed, a new idea is gaining traction: slowing down.
Hedge funds, mutual funds and other big investors have been looking for ways to fight back against the powerful computer systems used by so-called high-frequency traders. Such lightning-fast systems, which use algorithms to buy and sell securities, now account for more than half of U.S. stock trading, according to market researchers.
Money managers have been taking steps to gain back their lost advantage, and profits, underlying the deep tensions created by the increased role of high-frequency traders. Big investors now race to trade covertly, commonly slicing up their orders into smaller blocks using algorithms and routing them through "dark pools," the secretive electronic-trading networks that anonymously match buyers and sellers, usually on a first-come, first-served basis.
Now some entrepreneurs say they have developed ways to allow the less fleet-footed to level the playing field. They are aiming to convince traders and institutions that their new trading systems offer a leg up by decelerating the execution of trades.
"Everyone feels like they're being taken advantage of" in today's markets, which make speed mandatory "so you don't get eaten by the other sharks," said D. Keith Ross Jr., a 57-year-old former options trader who runs PDQ Enterprises.
Ross knows speed: He formerly was chief executive of Getco, one of the world's largest high-speed trading firms. PDQ, based in Glenview, Ill., operates a trading platform that builds a split-second pause into each trade.
With PDQ's platform, buyers and sellers plug in their trading algorithms -- programs that process data from markets and elsewhere to identify and execute trades -- in order to seek matches for their orders. By pausing each order for 20 milliseconds, or 20 one-thousandths of a second, PDQ says a better price -- such as a higher offer to buy -- gets a chance to win against one that's faster but less attractive.
The slowdown wouldn't have made a difference back when trades were measured in minutes, but it goes against the grain of markets where traders compete by fractions of a second.
Los Angeles-based Wedbush Securities invested in PDQ in 2007 and owns less than 5% of the company. Jeffrey Bell, Wedbush Securities' head of clearing and technology and the chief executive of Lime Brokerage, an affiliate, said PDQ has had a tough slog, but is "starting to turn the corner."
"The basic concept of putting an order out there, and having a little time to have liquidity pool up, should facilitate larger orders," Bell said.
Money managers over the past several years have become increasingly concerned that the speedster traders can detect their "buy" and "sell" orders, gaining an unfair advantage by jumping ahead of trades.
High-frequency traders have helped U.S. equity markets reach a "peak of efficiency," said Brian Conroy, the head of capital markets for mutual-fund giant Fidelity. But "the reality is it's a very complicated and fragmented market. You have to be aware of what's happening."
James Overdahl, a former chief economist at the Securities and Exchange Commission who is an adviser to the Futures Industry Association Principal Traders Group, a coalition of high-frequency trading firms, said such traders have boosted pricing efficiency more than they have added risk.
