HFT and Systemic Risk

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’….