BST North America Roundup: Staying Secure, HFT Mayhem

After a number of years during which the conference agenda was dominated by regulation and its impact on investment managers, the thrust at 2014's event was decidedly different.

Specifically, both keynotes were presented by senior information security officers, one from the CISO at former Lehman Brothers property Neuberger Berman, and the other from the Federal Reserve Bank of New York. Blackstone CISO Jay Leek served on the morning C-Level panel as well.

Taken together, their different approaches to the subject and common candor made perfectly clear that even if the era of post-crisis regulatory headaches isn't over, a new tech risk migraine—around protecting client data, preventing and detecting cyber threats, and shoring up internal information security more broadly—is now in thrall.

Colorful
As every year, the debate throughout the day was colorful, from one hedge fund co-founder declaring during a cloud session the imminent demise of the chief technologist, to Leek's colleague, Blackstone CTO Bill Murphy, humorously couching his comments about the sometimes-uneasy give-and-take between vendors and clients in terms of marriage.

Besides the focus on information security, though, two panels also stood out for their flavor. One, which I'll recap on Monday, was chock full of chief risk officers representing firms spanning from Prologue Capital, a $2 billion hedge fund, to the far larger and more diverse Wells Fargo Asset Management. That so many CROs are now closely attuned to their firms' technology is surely indicative of a sea change in terms of the skillset now required to properly manage risk, and the way these two functions are now firmly bridged.

The other, unsurprisingly, was a discussion on high-frequency trading (HFT), a chat that became a powder keg only a few minutes in, and mostly stayed that way for the duration.

Barbs and jabs like "dishonorable" and "disingenuous" were lobbed about, even as the central disagreement was a nuanced one: What actually constitutes the practice of frontrunning, and why, under various definitions, should or shouldn't it be considered predatory—or, like spoofing, illegal?

In some ways, the fireworks were a welcome change from the typical post-Flash Boys conversation during 2014 that has, a few too many times, demonstrated only cursory knowledge of the subtleties underlying HFT, or blatant self-interest. That's the benefit of having three proprietary traders going blow for blow.

Prop v. Institutional?
But I would be remiss without also identifying the conversation's most obvious omission: input from a traditional asset management perspective (or, indeed, any discussion of their role in all this by panelists who were present).

I found myself wondering whether these institutions—while regularly losing pennies to sharks and queue-jumpers, or paying their brokers for anti-gaming algos instead—still would prefer getting their trades done expediently, rather than shaking up existing market structure in a way that could, just as Regulation NMS did, potentially make things more complicated for them.

In other words, is it a case of better the (high-speed) devil you know'?

As one panelist said, if the industry doesn't like co-location or payment-for-flow, then ban them—but understand that exchanges' datacenter real estate will always be immensely valuable. Likewise, if not rebates, then something else will drive orders through the market. Between the lines, the message about substantial change was fairly plain: fat chance of that.

The conundrum was highlighted by a parting question from the audience, too. A simple query about whether the combination of higher HFT scrutiny, the evermore marginal difference HFT firms can gain from tech-heavy latency arbitrage, and broader public sourness about market practices will adversely affect spreads and the health of the equities market generally.

"Spreads will widen," was the agreed sentiment. Fair enough; they're simply catching up with opinion.