RBC looks to hammer high-frequency traders with new technology

RBC is looking to level the playing field against high-frequency traders who they say are “gaming the system”.

Patent application No. 13281486, “Synchronized Processing of Data by Networked Computing Systems”, has been approved in the U.S. The technology, nicknamed “THOR”, is designed to level the playing field against high-frequency traders. THOR has operated in beta, but has been tested by several North American clients.

RBC Capital Markets, the corporate and investment banking division of Royal Bank, first deployed the smart order-routing technology in 2010, in an effort to solve the “market structure challenges” posed by the nanosecond frequency of the average logarithm engaged in trading. It began marketing the software to clients as an “anti-gaming technology”, gaming in this case meaning to eliminate the time advantage obtained by competitors who effectively “game the system”.

“We developed THOR because our clients rely on RBC, as their broker, to develop solutions and strategies that level the playing field on their behalf in today’s complex marketplace and achieve best execution,” stated Robert Grubert, head of U.S. Equities at RBC Capital Markets. “The allowance of a patent by the USPTO is a testament to THOR’s ingenuity and uniqueness.”

While high-frequency traders operate in a sequential fashion, sending orders to trading venues according to which offers the steepest rebate, THOR operates by a “spray” method, sending orders to multiple exchanges simultaneously regardless of rebate.

In 2011, Toronto-based Hillside Investment Management, which handles $500 million in equities, gave the technology a thumbs-up. Kelly Reynolds, Hillside’s director of investment, praised the technology’s “real-time latency adjustment for orders”. RBC filed with the U.S. Patent Office for THOR in December of 2009, and has applications pending in Canada, Australia and the European Union.

Aside from employing quotidian methods like monitoring Twitter and news feeds and executing trades based on keyword frequency, high-frequency traders have also developed algorithms to execute trades based on the footprints created by the typical pattern of institutional investing. High-frequency traders have earned the ire of these institutions by executing orders based on these footprints. THOR provides a method of sweeping these footprints away, making it more difficult for HFTs to sniff out a pattern that might trigger a cluster of short-term trades.

In the U.S. high-frequency traders constitute about 2% of all investment firms, but account for 74% of equity order volume. That, coupled with the fact that very few people can contemplate the lightning speeds and complicated nature of algorithmic trading, has given high-frequency trading a bad reputation and extra scrutiny from the Securities and Exchange Commission.

Not everyone believes high-frequency trading to be quite the menace the SEC, among others, portray it as. The advent of HFT has been found to lower commissions and trade processing fees. One HFT firm claimed a 10-fold increase in trading efficiency, stating plainly that its methods represent progress towards ever-increasing benefits for all investors: “Progress is almost always accompanied by an increase in efficiencies.”

RBC’s efforts were led by Bradley Katsuyama, was educated at the University of Waterloo.

Steve Wunsch, writing in Tabb Forum, believes that HFT has a bad rap based on perception rather than reality. “If institutions would simply recognize that it is pointless to try to compete with high-frequency traders under the guise of lowering trading costs, they would save themselves a lot of headaches, and probably trading costs, too. And retail individuals, however incensed they may be at the unfairness of the HFT world, would do themselves a big favor by coming back into the market, which has never been better designed or more favorably arranged to accommodate their trading needs.”

While Europe contemplates banning high-frequency trading altogether, RBC’s THOR presents a means of mitigating what it perceives as the market distortions induced by trader algorithms. Not without controversy, though. Advocates for high-frequency traders have pointed out that THOR itself is an algorithm, and provides at best a stopgap solution to a problem that is likely here to stay. The patent will be valid until 2029.