Pity the poor HFT lobby. If you recall in a previous post http://blog.themistrading.com/?p=2760 we highlighted how the Proprietary Trading Group lobby has been spending hundreds of thousands of dollars to gain political muscle and regulator support. We also commented that “It appears to us that they are spending their money much more on influencing and buying political and regulator support, than they are on fixing their image with the public and investors.” Based on the events of the past two weeks, we think we were spot on in this analysis. The public has turned on HFT in a very negative way. As when most bad events happen, a culprit is quickly sought out. And the extreme volatility of the past few weeks coupled with some major losses have some pretty senior pundits and the investing public looking for someone to blame. In their crosshairs is HFT. The secretive group that the WSJ said made $60 million on August 8th when the Dow plunged 635 points now has a very serious image problem. Pundit after pundit on financial television, including even Wilbur Ross, continue to blame HFT for the market volatility. And what does the HFT lobby say in response to these criticisms – nothing. Probably because they are too busy staking out Rep Bachus’ DC office. Instead, we read articles where the usual defenders (the Narang brothers and Irene Aldridge) say they are getting a bad rap and HFT is just “math”.

We have long warned about the dangers of relying on HFT for liquidity. Unfortunately, it took some extreme volatility for the public to finally catch on. But there is another culprit that has gotten a free pass so far. Of course, we are speaking about the HFT enablers, the exchanges. After all, it is the exchanges that continue to arm their HFT clients with the weapons necessary to always beat the investing public. The exchanges have always been quick to defend HFT as just “market making evolved” and “liquidity providers”. This time around though they seem to be leaving their HFT comrades to defend themselves. They seem to be keeping their distance, hoping that nobody connects the dots and starts pointing fingers at them.

Yesterday, however, after Sarkozy and Merkel said they will propose a financial transaction tax, the market spoke and pointed its finger right at the exchanges. A financial transaction tax would certainly be a devastating blow to HFT. But it would also be a devastating blow to the exchanges. Shares of the exchanges took a nosedive after this news hit yesterday – NYX down 8.4%, ICE down 4.5%, CME down 3.9% and NDAQ down 2.8%. So there you have it. The market has spoken and has just pointed its finger at another culprit.