Exchanges and the Frankenstein market

The CNBC “Man vs Machine” series finished yesterday.  Overall, we think they did a pretty good job raising awareness of some of the issues that our equity market is facing.  Obviously, we would have liked to share some of our opinions with them but for some reason they didn’t call on us (must have been because Joe started barked at the Cash Cow last year, something about how he hoped her machines didn’t blow a fuse). 

 As most of you are aware, we have taken major issue with some of the exchange practices over the past few years.  We believe that the problem with our equity market lies in its structure which has been deformed over the past decade due to some of the regulations that were passed.  We also believe that the exchanges are at the heart of the problem.  Since they are now all for-profit entities, major conflicts of interests now exist in their business models.  We highlighted an example of this in our “Data Feed” paper that we published in May (http://www.themistrading.com/article_files/0000/0555/5-11-10_Data_Theft_On_Wall_Street_latest.pdf).  Major portions of their revenue now come from market data services like co-location and the sale of direct data feeds.  No longer do they get the majority of revenue from corporate listings and services.  When most new listing are ETF’s and not IPO’s, exchanges need to look elsewhere for profits.

 Yesterday, CNBC ran two good reports with two exchange executives, Bob Greifeld of NASDAQ (http://www.cnbc.com/id/15840232?video=1592905903&play=1) and Larry Liebowitz of NYSE (http://www.cnbc.com/id/15840232?video=1592980226&play=1 )  There was some common themes with both these interviews:  Tighter spreads, more liquidity, lower costs and competition is good.  Well, we have heard this all before.  In fact, they ran an interview later in the day with the head of the HFT lobby in DC and he pretty much echoed the exchange executives comments.  Greifeld even said, he does not think there will be another Flash Crash since single stock circuit breakers have been put in place and there is a proposal for the elimination of stub quotes.   Sounds like a plan but not really.  We are still amazed at how many people think that circuit breakers are the cure to the Flash Crash.  Do they not remember that the exchanges already have market wide circuit breakers that have been in place for years that will halt trading for at least 1 hour should a 10% market move occur?  May 6th was shocking to many investors because of the ferocious speed of the decline followed by the less talked about rapid rebound.  To suggest that single stock circuit breakers and the elimination of stub quotes are going to fix this Frankenstein market is just plain irresponsible and sends a false signal to investors.   Rather than focus on band aids, maybe exchange executives should start thinking about the bigger picture.  The public has voted with their money and they have decided to leave the equity market and let the computers trade with each other.