This morning we awaken to find the Bachus/Hensarling August 24th 2010 letter to Mary Schapiro in our inbox, which we include as an attachment for you to read. Ever since the HFT industry formed their own lobbying group in Washington DC a few months back, we have expected a letter like this to surface. We certainly have expected it to surface given the recent anti-HFT media attention post May 6th. Please allow us summarize their letter for you.
“In 2008 markets functioned exceptionally well. High Frequency Trading is beneficial to all. We all benefit from their liquidity. If it goes away we will all suffer. Spreads have never been narrower. Costs of trading have never been lower. There is no evidence that flash order types are bad. Don’t make any changes unless you have more data. Turning back the clock on innovation will do harm. With our bias in mind, please answer in writing to us by September 10th, 2010 the following 15 rhetorical questions.”
Had we told you this letter was written by the HFT lobby, you would have shrugged while commenting that such drivel is what you would expect that lobby to say. Perhaps we all should shrug less, and be more alarmed, that it comes from two congressman up for re-election, and written on the Committee on Financial Services letterhead. Incidentally, you can see who contributed to Representative Bachus so far in 2010 here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.
We understand how politics work in the United States. We know there will always be certain groups that have the ear of certain Congressman. However, let us compare this letter, with its open-ended and one-sided blatant bias with the well thought out letter from Senator Kaufman dated August 5th, where he analyzed our market structure deficiencies and offered up 9 separate potential solutions Kaufman Letter to Schapiro.
The Bachus/Hensarling letter states as fact that the US markets functioned exceptionally well during the financial meltdown of 2008. But did they? Where is the Congressmen’s data to support that claim, aside from comments made by HFT proponents? In addition, their letter wants us all to ignore everything that has happened in 2009 and subsequently regarding HFT. They want us to ignore the arrest of Sergey Aleynikov, who stole code from Goldman Sachs that could be used to manipulate markets. They want us to ignore the studies by brokerage firms and TCA firms that demonstrate the negative and predatory effects of HFT. They want you to pretend you never heard of quote stuffing.
The Bachus/ Hensarling letter also states as fact that our markets remain efficient, transparent, and accessible to all investors. They obviously do not understand that our markets have become tiered, based on the degree of co-location paid to the exchanges. They also don’t understand that 20% of trading volumes are executed in the dark, which is less than transparent, shall we say. They also don’t understand that our markets have altered their focus from investing and towards ultra-short term hyper trading, collateral damage and capital formation be damned.
The Bachus/Hensarling letter states that, as we all do not know what caused the events of May 6th, we should refrain from using terms like “Flash Crash”, as it presumes flash order types were the culprit. To this point, we say the following: not only is the “re-naming and spin management” game a silly one for the civil servants, whose salaries we pay, to play, but their argument demonstrates the lack of knowledge by these two Congressmen. The May 6th Flash Crash is aptly named, because the events of that day took place in flash-like speed. The May 6th Flash Crash was never named because of any reference to flash order types. The Congressmen know precious little of the issue they are attempting to address! Given the other portions of this letter that specifically address the SEC’s focus on flash order types, we easily see the real purpose of this letter, which is to advocate the position of those who wish to utilize these order types in equities and options.
We suggest that the Congressmen listen to what the real owners of our market have been saying. They may want to read the letters recently written from Iridian Asset, Southeastern Asset, and Baron Asset. Or listen to the words of Invesco and Principal Global. These large institutional players have become frustrated with our fragmented market structure and they are now demanding change. Most of them have warned that unless significant changes are made then we should expect more flash crashes to happen. They may also want to listen to the legions of retail investors who have totally lost confidence in our equity market and are withdrawing their funds every month. So, who are we to believe? Two up-for-reelection Congressmen who appear highly conflicted, or the true owners of this market, as well as the outgoing Senator Kaufman who has clearly demonstrated that he understands what the issues are facing our market structure?