Their 2 Cents Ain’t Even Worth 2 Cents!

You have heard it a million times: Our markets are tight efficient and low cost; would you rather we go back to 25 cent spreads and 1987? HFT defenders – like HFT firms, exchanges, and other firms that sell product to them – always make an extreme comparison if you question the inkling that they are not beneficial to the markets. Today we wish to not make an extreme comparison. We wish to take you back to 2006, pre Reg NMS, and not 1987. We wish to do this using data actually provided to the SEC by a high frequency trading firm, RGM Advisors.

In a comment letter written just two weeks ago to the SEC’s Concept Release on Equity Market Structure, Richard Gorelick of the firm that bears his name has provided data on spreads over time, and has claimed again that HFT has made markets more efficient and low cost, because of these lower spreads. We would love for you to read his letter, and pay attention in particular to Figure 1 on Page 3. It is a chart that shows how spreads have narrowed in the Russell 1000 between early 2006 and today – a period of six years. During this period, the average spread on a Russell 1000 stock has fallen from about 3.5 cents to 2 cents.


So, nearly six years later, after the following:

– the implementation of REG NMS

– Exchanges becoming for-profit and publicly traded entities

– the spending of billions of dollars in technology

– tunnel digging to save single-digit thousandths of a second in trade speed

– intense lobbying by stock exchanges and HFT firms in Washington DC

–  colocation

–  algorithm stealing and employee poaching

–  Smart Order Routing sweaty handshaking

–  large scale Dark Pool proliferation

–  flash crashes in markets, IPOs, single stocks, bonds, options, and currencies

–  numerous “liquidity provider” programs at exchanges and dark pools

–  vastly increased fees at exchanges

–  vastly increased data costs for the industry

–   vastly increased costs for taxpayers to fund regulatory bodies

–  billions in profits for HFT firms and matched by billions by companies arming them


We see that spreads in the Russell 1000 have narrowed 1.5 cents. Let’s say that again. Russell 1000 spreads have fallen a whopping penny and a half, which is presumably the measure of benefit to the entire marketplace and long term investors. Even if you believe that spreads have narrowed (i.e. you ignore studies that show that they indeed not have narrowed once you consider trade size), and you buy in to Richard Gorelick’s data, you have to ask yourselves if it was worth it. We have increased systemic risk and created great regulatory burdens – all for a benefit of a stinking 1.5 cents?

Who wants a mulligan? We do. Not to 1987 – we’ll settle for 2006.