Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned

Oeyvind Schanke, head of asset strategies at Norway’s $860 billion sovereign wealth fund, has worked out how to dodge traders in the U.S. trying to profit on his orders by leaving no pattern for them to track.

Investors who want to pre-empt trades by the world’s biggest sovereign-wealth fund and act on that information to make a profit -- a practice known as front running -- won’t have much success, he said.

“We’ve done a lot to try and avoid leaving those patterns,” Schanke said in a Nov. 14 interview at the Oslo headquarters of the fund. “We’re trading less using algorithmic trading now than we did some years ago and are doing much more trading in large block sizes to avoid pattern-reading.”

Norges Bank Investment Management, which runs the wealth fund as part of the central bank, held about $150 billion in U.S. stocks at the end of September, according to its latest quarterly report. It holds $500 billion in stocks globally and is Europe’s biggest investor. Schanke, who started at the fund as a trader in 2001, oversees which companies and instruments it invests in from NBIM’s London office.

The fund gets its guidelines from the government in Oslo and is mandated to hold 60 percent in stocks, 35 percent in bonds and the rest in real estate. Norway projects the fund will top $1 trillion over the next few years as the nation of 5 million safeguards its petroleum wealth for future generations.

Its stock holdings returned 5 percent in the first nine months of the year, while the total portfolio rose 5.1 percent.

Rising Costs

The investor’s biggest challenge in the U.S. is the fragmented market structure, which has driven up costs across as many as 52 trading venues, introducing a “latency overcharge,” Schanke said.

The market as he sees it “isn’t good enough for raising investor confidence,” which has been an issue in the U.S. since the financial crisis and was deepened by the flash crash of May 2010. While the solution isn’t necessarily public ownership of exchanges, he said a closer look at the existing regulation could help make markets less complicated.

“Some of the things that an exchange does are in a way a utility function,” Schanke said.

The fund in June said it supported Brad Katsuyama’s IEX Group Inc. exchange because it allows “all players to participate on the same terms.”

IEX, which the wealth fund uses for both direct and indirect trades, doesn’t pay firms to buy or sell shares, shunning a practice that many markets use to lure business from high-speed traders. It mandates a 350-microsecond delay between requests to trade and executions to prevent traders from pre-empting their moves through high-frequency maneuvers.

IEX, made famous in Michael Lewis’s best-selling book “Flash Boys” could shield investors from the predatory habits of high-frequency traders, the fund said then.

What the fund needs is a way to make large trades without impacting the markets, something that Schanke said is easier to do in Europe, where rules are more relaxed.

“Trying to find liquidity without having an impact when you’re doing it is an over-arching challenge we will always have,” he said.

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