There were some very interesting comments at the World Federation of Exchanges (the WFE) last week in Paris.   The WFE is a trade association of stock, futures and options exchanges.  They bill themselves as “responsible for functioning of key components in the financial world.”  Last week, 68 chairman and CEO’s of the world’s leading exchanges had a sit down.  These were the “capo di tutti” getting together to discuss the exchange business.  This exchange boss meeting reminded us of the 1957 meeting in Apalachin, NY where powerful Mafiosi from  all over the US, Canada and Italy met at the estate of Joe Barbara to discuss the future of their gambling and narcotics businesses.  Some of the bosses at the meeting included Vito Genovese, Carlo Gambino, Joe Bonanno and Meyer Lansky. 

Some of the bosses at the WFE meeting included LSE boss Xavier Rolet , NYSE boss Duncan Niederauer and Interactive Brokers Group chief Thomas Peterffy.  The exchange bosses met to discuss the future of the exchange business including algorithmic and high frequency trading.  We were expecting to hear the usual spreads are tight and liquidity has never been better speeches.  But we got something very different.  It seems there is a rift amongst some of the bosses.  Mr Rolet had this to say about HFT:

“Liquidity provision is not its primary purpose. It is design is fundamentally proprietary profit-driven, but is a required activity given regulators have decided to introduce competition and fragmentation.”  Mr. Niederauer also warned of fragmentation problems, he said “If we are not careful where this takes us is that the attractiveness of quoting in the public markets will dissipate.”

But the most shocking comments came from Mr Peterffy of Interactive Brokers (http://www.interactivebrokers.com/download/worldFederationOfExchanges.pdf).   Here are a few highlights:

 “In the last 20 years came computers, electronic communications, electronic exchanges, darkpools, flash orders, multiple exchanges, alternative trading venues, direct accessbrokers, OTC derivatives, High Frequency Traders, MiFID in Europe, Reg. NMS in the U.S. — and what we have today is a complete mess”

“It is not so much anymore that the public does not trust their brokers. They do not trust the markets, the exchanges, or the regulators either.”

“It is vitally important that we bring an end to this crisis of trust before it spreads any further; that we bring back order, fair dealing and trust in the marketplace.”

 “To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand.”

“The root of the problem, as always, is short-sighted greed on the part of the brokers.”

Finally, the code of silence has been broken. We could imagine that many of the exchange bosses were not happy about being called out as responsible for the lack of trust and confidence in our markets.  Their short term turf war is not helping anybody but themselves.  But the exchange executives should be happy that their meeting ended differently than the mafia meeting in Apalchin.  That meeting was busted up early when a NY state trooper spotted the mobsters and called for reinforcements and surrounded the estate. When the attendees were alerted, they chaotically fled the location, some fleeing on foot into the woods.