1. Investment Strategy On-Demand
Webinar Series
Nothing in this document should be construed as legal or investment advice. Please consult
with your independent professional for any such advice.

2. High-Frequency Trading
Corey Schier, Senior Consultant, Aon Hewitt

3. Investment Strategy On-Demand Webinar Series | June 16 2014 2
What is High-Frequency Trading?
 High-frequency trading (“HFT”) is a computerized form of algorithmic trading
 It has been estimated that HFT accounts for between 50% to 70% of equity orders in
the U.S. and 50% by value
 HFT has taken place at least since 1999, after the U.S. SEC authorized electronic
exchanges
 Examples of HFT firms: KCG Holdings (formerly Getco), Citadel, Tradebot, and Virtu
Speed of HFT Trades Millisecond Microsecond Nanosecond
Per Second 1/1,000 1/1,000,000 1/1,000,000,000

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Investment Manager Views on HFT
View on HFT Positive Neutral Negative
Type of Manager by Approach Quantitative
Fundamental
Passive
Fundamental
Passive
Quantitative
Activist Hedge
Funds
Type of Manager by Annual
Portfolio Turnover Low Low High
 Head traders admit the need to be more careful about which trading algorithms are
utilized for trading and order flow due to the presence of HFT
 Some managers utilize dark pools for trading, since the trade orders within these pools
are unavailable to the public. However, care must be taken with trading in Dark Pools
since HFT firms may pay for private trading and data access to Dark Pool transactions
 Traders view any negative impacts of HFT as a tax of doing business in an electronic
world

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Regulation and Investigations
 HFT has evolved even further after the U.S. SEC created the Regulation National
Market System (“Reg NMS”)
 The Commodity Futures Trading Commission recently (May 2014) said that it is
preparing new proposed rules for automated trading
 The regulators began looking at the relationship between the HFT firms and electronic
exchanges as well as possible front running in early 2014
2005 - 2007
•U.S. SEC
Implements Reg
NMS / Trade-
Through/Order
Protection Rule
•Launch of many
crossing networks
by banks &
investment firms
2008 - 2011
•Financial Crises of
2008 & 2009
•More crossing
networks launched
•Flash Crash Event
of 2010
2012 - 2014
•Public attention on
HFT grows
•CFTC puts out a
concept release on
automated trading
•U.S. SEC as well
as the NY Attorney
General launch
Investigations on
HFT

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Key Takeaways
The regulators are likely to propose new rules on automated
trading and HFT as a result of their investigations
The economies of scale of electronic trading in general has
contributed to lowering trade costs for investors
Concerns of HFT to institutional investors is somewhat
mitigated by their trading programs and relative cost savings
1
2
3

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What are the Next Questions?
 When evaluating the current and future impact of HFT, there are many questions to think
about such as:
– Does the U.S. SEC have the appropriate level of resources, experience and
knowledge to investigate HFT properly and develop an effective set of HFT
regulations?
– What would be the possible impacts from any future HFT regulation?
– Why would the electronic exchanges ever oppose HFT since it generates such large
revenues for them?
– How sophisticated is the trading at the investment management firms that we utilize?
 We recommend that investors be aware of market dynamics with HFT and consider
trading capabilities of investment managers to minimize the risk of negative
consequences from HFT

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Appendix A: Definitions
 Algorithmic Trading – Algorithmic trading uses electronic platforms for entering trading
orders with an algorithm to execute pre-programmed trading instructions based on
variables such as timing, price, or quantity of the order. Algorithmic trading is widely used
by investment management firms to divide large trades into several smaller trades to
manage market impact and risk
 Dark Pools – Dark pools of liquidity offer a private venue for trading securities away from
the public exchanges. They are alternative electronic stock exchanges where trading
takes place anonymously and trading data is not available to the public
 Front Running – Front running is the illegal practice of trading a security based on
advance knowledge of pending orders from other investors. Front running may also
occur in the context of insider trading

9. Investment Strategy On-Demand Webinar Series | June 16 2014
Contact List
Corey Schier, Senior Consultant
Global Investment Management
Corey.Schier@aonhewitt.com

10. Investment Strategy On-Demand Webinar Series | June 16 2014
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