Morgan Stanley has said it is successfully restoring client access to liquidity eroded by high-frequency competitors following an overhaul of its equity trading infrastructure.
William Neuberger, co-head of Morgan Stanley Electronic Trading, said initial signs are encouraging and are reversing a trend of falling capture rates for electronic orders seen in recent years.
US clients began using the revamped system in the last three months and Neuberger told theTRADEnews.com initial indications signalled the firm was on track to restore the level at which client orders were filled at the offer - the core aim of the upgrade.
"This upgrade has allowed us to combat some of the new and challenging dynamics in today's equity markets including 'fading', when high-frequency trading firms may cancel orders based on activity in other exchanges, which they see ahead of other participants," Neuberger said.
Rates of conversion for Morgan Stanley clients seeking to take liquidity posted electronically have slipped from 98-99% 15 years ago, to the "high 80s" more recently. The firm based this drop on the rise of HFT entities, which through techniques such as venue co-location and placement of servers within data centres, trade faster than other participants.
To combat this trend, Neuberger said Morgan Stanley engaged HFT-experienced software and hardware engineers to extend low-latency competitiveness to its clients.
"This is the first time we've done a full re-write of our equity trading infrastructure - it's brand new software running on brand new hardware, and we've specifically brought in expertise from low latency trading firms to achieve this," he said.
A significant drop in US equity market trading volumes since 2008 added impetus to the revamp, as more than ever clients need to take liquidity posted at the offer. However, Neuberger said the 18-month project was not client-driven, but reflected the broader impact of HFT on the market.
"HFT is a reality in today's market and we want to give our clients every advantage of trading in the current environment," he said.
The firm's internal traders were the first to use the new system, which was extended to US clients three months ago. A global rollout will occur over the rest of this year. Products and services, such as trading algorithms, were not altered, but will benefit from the increased capture rate.
HFT has become a divisive issue among market participants in recent years. Many claim HFT firms use advanced technology to unfairly arbitrage orders across markets and that the market making role of such entities is overstated because of the ability to adjust quotes based on activity in other markets.
Conversely, low-latency trading has given rise to a new subset of liquidity providers, who, despite benefitting from high-speed access and market data, provide liquidity to markets during a period of low equity volumes.