On Friday we recapped some recent market history. I suppose we did this to frame some perspective on where and how some of our modern exchanges were born (ie Datek ==> Island ==> Nasdaq, and Alltech ==> Attain ==> Direct Edge, to touch on two examples). Perspective is important. One can argue that the most crucial tool any leader must have in their tool box is perspective. Perspective sets direction. It recognizes where we have all come from, and it is crucial for charting a course for our future. Leaders with perspective keep their organizations from becoming single-minded in viewpoint and practice. Leaders with perspective keep their organizations from myopically pursuing paths that can only end in destruction of the field in which they play and feed, as well as their own.
We can’t help but fear that the leadership all around our equity markets (actually it is not confined to our equity markets) is lacking this crucial tool. Exchanges pursue strategies of catering and arming a subset of hyper traders with any and all means, as this will amp up their immediate volumes and profitability. Next quarter’s earnings for all of them are therefore maximized. In the process however, the exchanges are facilitating the destruction of the field. The markets are dying, their chief role of capital formation having been abdicated. Amazingly the exchanges will not only kill off their sustenance, but also themselves. This unfortunately has consequence outside their playground.
Recently we wrote about some data feed leakage in a white paper. We wanted more than anything to start a spark, and make a difference in trying to reverse the myopic courses the market’s leadership has placed it on. As Europe has shown us, the exchanges will change their dangerous and harmful behaviors when they have order flow removed from them. Who can remove their order flow and effect such positive change? Institutional Investors can. Regulators can aid in the righting of some of these wrongs (And we believe firmly in the integrity and leadership of our current regulators), but the major crux of change will happen by actions in the free marketplace.
The next time you hear of exchanges trying to sell products whose purposes are solely to help ultra short term traders re-engineer institutional footsteps and behaviors, to their disadvantage, speak out. At first speak out with a firm request to them. If that does not work, and they throw a wolf in sheep’s clothing at you to try to pacify you, remove all of your flow from touching that exchange. Your success in changing their dangerous behavior will ultimately be the only saving grace for our capital markets, and the role we need them to serve if our country is to become well again.
Oh, What is the picture I chose for today’s Thoughts? This is a neighbor of mine in Normandy Beach. He at one point in his life was a captain of industry, while now he relaxes and hosts his very large and extended Irish family at the beach nearly all summer long. Each morning he comes out and tends his garden, which is full of Rose of Sharon, Sea Pines, Lilies, Black Eyed Susans, indigenous dune grass, zinnias, cucumbers, tomatoes, and squash. Each morning passers-by like me walk past and say good morning, as he tries to give us tomatoes form his garden. Each morning he talks to dog walkers and children on bikes, all the while smiling with a twinkle in his eye. On Sunday morning as I spoke with him, a young dad with his kids walked by, and the dad told him that he should get an automatic irrigation system installed. My neighbor stopped and smiled, and then wished the young dad a good morning, but the dad was already gone three houses down; he had moved on. Now the young dad may have had some kind of technological perspective I suppose, but he was so myopic as to what he was experiencing on his morning walk, that he couldn’t see a man relaxing by manually watering his garden, a man talking with his neighbors, a man interacting with children, and friends, and just plain old living.