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HFT and Systemic Risk


August, 2009

Man, slow days in the market are dangerous for idle and bizarre minds (mine). The more I dig, the more questions I come up with.

Today I am questioning the whole rebate trading game (payment for order flow by for-profit entities and exchanges). Some of these exchanges actually have accelerated rebate programs. Instead of paying their subscribers their monthly rebate in a lump sum at the end of each month, these exchanges actually pitch to the marketplace as an advantage, that they will pay the rebates WEEKLY instead, which will help brokers meet their net capital requirements with the regulators. You see, the regulators have ruled that “rebate receivables” are not allowed in a net capital calculation.

Oh, by the way to participate in the free weekly rebate payment option, you must average a monthly rebate of at least $50,000. This comes out to at least 20 million shares per month. So we are not talking about your mom, D. And we are not talking about Themis either, unfortunately.  Pshaw.

Wait. It just hit me. Are firms that are so marginal in terms of what their net capital is (they must be if they are relying on getting quicker rebates to meet their nut) trading at least 20 million shares per month PER EACH EXCHANGE THEY TRADE ON? These marginal firms control how much volume? This is not risky to the system?

I hope I am wrong, but if I am looking at this correctly, well them I’m just sayin’….

One Response to “HFT and Systemic Risk”

  1. HenryS

    Yep – If cash flow is so poor that they have to rely on these – – and with the other items you have pointed out where they can buy and sell at the same price and still make money — what is really going on in the market place.

    Will you end up being black listed because you are bringing all of this to light?

    Or are you hoping your volume will increase enough so that you can join the group?

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