Yesterday, the president of the 3rd largest exchange in the United States wrote a letter to the trading community urging participants to draft a comment letter to the SEC’s Concept release http://batstrading.com/resources/newsletters/2010-03-Commentary.pdf  . We agree.  Everybody should make their opinions heard on the current state of the equity market. 

After reading the BATS letter, it is clear which side of the debate this major exchange is on. However, we thought exchanges were supposed to be impartial organizations who looked out for all investor interests.  We didn’t think exchanges were in the business of propaganda.   Based on the letter, BATS seems to believe that everything is great with the current equity market. They state, “BATS doesn’t believe the equities markets are broken.”  They have no problem with co-location, stating “Co-location increases the efficiency of trading, and all participants realize the benefits of unfettered close proximity to exchange platforms.”   They also seem to have focused on the SEC’s request to have any comment backed by as much data as possible.   We agree completely that opinions should be backed by as much data as possible.  However, when most of that data is securely locked away in some of the major high frequency traders vaults, it may be hard to access. 

Oops, did we just say High Frequency Trading.  We were asked to resist the urge to use that HFT label at the request of the BATS president in his letter.  You see, he thinks its a really bad term that is driving lots of misunderstanding in the  media and Washington.  What’s so bad about HFT?  Are they trying to hide something? Aren’t these market players trading in a high frequency manner?  Most estimates are that at least 50% of the equity volume is HFT (oops, said it again).  So, if it looks like a duck and quacks like a duck, then guess what.  We have learned all too well during the financial crisis of the past two years, that Wall Street is great at creating acronyms (CDO and CDS just to name a few).  And, we have also learned that investors must decipher what these acronyms actually mean to protect themselves from the potential disaster that they can create.  So, sorry, we think we will continue to use the term HFT (oops).

 Maybe the real problem with our current equity market structure is the for-profit exchange model that currently exists where conflicts of interests are rampant.