Controversy over high-frequency trading, fomented by Michael Lewis' new book, highlights the conflict many chief investment officers experience over the practice.
On the one hand, both pension fund executives and their external money managers are grateful that the development of electronic trading and the competitive exchanges established to serve the growing high-frequency trading segment has dramatically lowered trading costs.
On the other hand, it's maddening for many CIOs to suspect their portfolios' returns might be harmed from front-running by high-frequency trading algorithms.
A Pensions & Investments' online reader poll conducted last week showed 51.5% of respondents believe high-frequency trading is bad for institutional portfolios, while 17.1% said it's good. The remainder said it was neither good nor bad.
So far, most CIOs interviewed for this story report heightened water-cooler chatter about high-frequency trading, a result of the headlines surrounding the publication of Mr. Lewis' “Flash Boys.” They say they've yet to get any formal requests from trustees for an investigation into the practice and its impact on returns.
The $23 billion Texas County & District Retirement System, Austin, invests passively in the U.S. equity market, so high-frequency trading “hasn't been a topic of discussion in many of my conversations, but that was before Michael Lewis' book came out,” Paul J. Williams, investment officer, said in an e-mailed response to questions. Mr. Williams said he's curious to see if system trustees bring up the issue during their next board meeting.
But high-frequency trading has long been a serious conundrum for institutional investment teams.