Tag Archives: high frequency trading

Flash Boys Fight Over High Frequency: Op-Ed

MarketsMuse Editor Note: Having close on 3 decades “habitating” within the financial industry’s sell-side, this greybeard former trader turned opinionator and postulator is certainly fascinated by the spirited debate over “high-frequency trading”, not only because most of those arguing for and/or against HFT can only selectively point to lop-sided studies to defend their respective arguments , but the escalating war of words (over the Battle of the Transformers) has more recently captured the attention of the always beloved experts of financial industry market structure and trading technology: the Federal Bureau of Investigation. If there were an agency less qualified than the FBI to ask the right questions and determine whether any laws have been broken, it might be the always-conflicted and lobbyist-influenced SEC; particularly when real industry experts have vehemently pointed to an industry practice that truly undermines the credibility of financial markets: retail brokerages and custodians selling their customers orders to “preferenced market-makers” in exchange for cash..  [Then again, given that FBI Director Jim Comey came to his new job after serving as General Counsel for the world’s biggest and most high tech hedge fund, the debate about who is most conflicted becomes more complex]…..Ironically, the biggest beneficiary of the practice of payment for order flow is Charles Schwab (only because they’re arguably the biggest of the major custodians, but all others who do the same benefit accordingly)..whose Chairman/CEO announced this week that “HFT is a cancer that is plaguing the industry..” Clearly someone who likes to have their cake and eat it too.

In trading market lingo, “Bid Repeats”; the largest of the industry’s retail brokerage platforms–ostensibly those who have a fiduciary obligation to secure best execution on behalf of its clients when routing orders to the marketplace, are selling those orders to favored proprietary traders, a group whose primary obligation is to their own P&L, NOT the interests of public investors who would like to presume they are receiving best execution on their orders. Adding insult to injury, customers of these brokerages who know better and request their orders be routed to agency-only execution firms (whose role is limited to fiduciary broker and to secure true best execution by canvassing all market participants for best bids and offers) are rebuffed and faced with egregious fees  on any orders in which customers ask the custodian to “step-out” or “trade-away” to specific agency-only firms.

While most objective financial industry experts (if not experts from any other industry) would liken the practice of payment for order flow as a kickback scheme that undermines the notion of ‘fairness’, this practice, which clearly is antithetical to the notion of “fiduciary obligation” has gone virtually unmentioned by the media, and those from within the industry who have tried to raise this flag have been futily dismissed by advertiser-influenced media platforms, if not regulators responsible for overseeing fair and orderly market practices.

All of that said, and for an assortment of reasons that has led to market fragmentation,  the existing landscape enables a quagmire of complexity when trying to distill what makes sense, especially when those who have the biggest role in market efficiency are those who are focused on making dollars for themselves, not sense.

Perhaps one of the week’s best observations can be found not by replaying clips from heated debates broadcast on CNBC, but in an op-ed in today’s New York Times courtesy of Philip Delves Broughton, who, in critiquing the impact of Michael Lewis’s new book “Flash Boys”, frames the issue of HFT in a very intelligent way. His opinion piece,  “Flash Boys for the People” can be found by clicking on this link.


Wealth Fund Cautions Against Costs Exacted by High-Speed Trading

dealbook  Courtesy of NY Times

Wall Street firms and exchanges have long said that the speed and competition in the markets has made trading cheaper for everyone. Mary Jo White, the chairwoman of the Securities and Exchange Commission, recently referred to the United States stock market as the “envy of the world.”

But the top trader at the Norwegian fund, Oyvind G. Schanke, said not enough was heard from long-term investors like the fund, which holds $110 billion in United States’ stocks, and the asset managers representing American retirement savers. For them, Mr. Schanke said, the benefits of the technological changes of the last few years are not nearly as clear, and the costs of the system are often left out of the discussion.

“The U.S. market has gone through a lot of changes and has become quite complicated — and this complexity of the market creates a lot of challenges for a large investor like us,” said Mr. Schanke, the global head of stock trading for the fund, Norges Bank Investment Management. The fund invests some of the country’s oil wealth for future public programs.

Compared with five years ago, he said, “We don’t see any evidence that it is cheaper for us to trade.”

Mr. Schanke said the debate had gone off track largely because most of the research had examined narrow metrics to determine whether things were improving.

For the full column from the NY Times, please click here

Fragmentation Harming Market Quality, Warn Traders

Courtesy of MarketsMedia

With new trading venues catering to institutional investors ready to enter the fray, market participants say that more fragmentation is not necessarily the solution to cure market imbalances.

‘Fragmentation of the markets is not a good thing for long-term investors,” Manoj Narang, chief executive and founder of Tradeworx, a hedge fund and technology firm, told Markets Media. “Regulators need to look at ways to defragment the market. The more different venues there are, the more traders who are technologically sophisticated are at an advantage.”

Narang asserts that market fragmentation hurts, rather than helps, longer term investors because the technology utilized by institutions is not as sophisticated and advanced as those used by high-frequency trading firms. They are less able to effectively wade through the plethora of lit and dark venues in the markets.

“Having more trading venues just complicates matters,” Dennis Dick, a proprietary trader with Bright Trading, a prop trading firm, told Markets Media. “We keep adding more and more layers, adding exchanges and adding dark pools, to try to find a solution, but really the solution is to break it down and start simplifying it all.”

Noted John Houlahan, Chief Operating Officer of OMEX  Systems, a broker-neutral order routing and risk management platform that provides direct market access to major equities and options exchanges as well as so-called “dark pools” for broker dealers and buyside firms, “We seem to spend as much time adding routes to new exchanges and ECNs as we do building order and risk management applications. I’ve been in this business for 20 years, and I find myself scratching my head when discovering yet another new “liquidity center”, but with a different ‘spin’ compared to already-existing exchanges.

There are currently 13 equities exchanges in the U.S., along with nine options exchanges. Many of the exchanges are operated under the same corporate umbrella, with NYSE Euronext and Nasdaq OMX each operating three equities markets and two options markets apiece. This is an addition to the 40-50 dark pools operated by independent firms and broker-dealers.

“Do we really need 13 exchanges and 50 dark pools and 200 internalizing broker-dealers,” said Dick. “I know the Securities and Exchange Commission had good intentions with Reg NMS but now we’ve gone too far the other way. We need to start simplifying. The solution is not to add more dark pools.” Continue reading