Thoughts From an Industry Conference…
Lately, we have been getting asked to speak at a lot of industry conferences. This past Monday I was on a panel titled “Examining the Evolution of Market Structure” at a conference in NYC. The panel had the usual suspects – an ATS rep, an industry consultant, a broker algo provider and a Professor. I know, it sounds like an extremely boring version of Gilligans Island. The problem with these panels and conferences is that there is not much debate going on. The usual suspects all have similar, conflicted interests and all would like nothing to really change. It’s always funny when we get asked to participate in these types of conference. We remind the conference administrator about who we are and what our position is on market structure. We also always ask if it would be ok if the panel were to get involved in a “spirited” debate. And usually, much to our surprise, they still invite us to speak.
At this particular panel, I got to speak first and immediately tossed a few smoke grenades out there to see how the panel would react. Sure enough, the counter attack was quick. They weren’t going to let me invade their turf and spoil their usual “nothing to see here folks” party line. They quickly responded with the standard industry defenses – spreads have never been narrower, liquidity is abundant and commission costs have come down dramatically over the past few years. They all must have taken an extra shot of HFT Kool-Aid for this panel. But I had my quadruple shot of Starbucks espresso and was ready for them.
My strategy in a setting like this would be usually to take my argument to the audience and start to get their reaction. But as soon as I tried that, the pro-HFT crowd started to roll their eyes and shoot a few death stares. So, I quickly reversed course and did my best Fox News guest imitation and starting debating directly with my fellow panelists. To my surprise, they all admitted that fragmentation was a problem. They all were also quick to blame the media for demonizing HFT and over reacting to the May 6th Flash Crash. One panelist even thought that nobody was really harmed on May 6th since the market rebounded so quickly. Well, my espresso was really kicking in at this point and I felt compelled to teach the panel a little lesson on confidence and trust. We all lost on May 6th because public trust and confidence in the markets was dramatically hurt. I pointed out that the media is just reflecting what the public is telling them. Rather than trying to sweep May 6th under the rug and look for convenient scapegoats, market participants need to take a hard look at our current market structure and start to suggest significant improvements (not just Band Aids).
Whoa, who the heck is this guy and why is he ruining our usual song and dance sideshow? When the Q/A started, I fully expected to take some body blows from the audience. There were a couple of glancing jabs but nothing really stung. And then, one guy in the audience who runs an HFT firm stood up and said, “I can’t believe I’m going to say this but I agree with Joe”. He was referring to my comments about fragmentation. He said that he has recently been approached by all the 4 of the major exchanges to see if he would be interested in a new exchange that they were all thinking of creating. As if having 11 exchanges isn’t enough, the big exchanges want to continue splitting themselves even more. Even the HFT’s are getting frustrated with the exchanges and their constant quest to squeeze another penny out of their fragmented business model. If the exchanges aren’t careful, they may soon have to actually add some value in order to keep their high speed money flowing.
Where we left off 4:00pm EST:
INDU 11,169.46 +5.41
SPX 1,185.64 +0.02
CCMP 2,497.29 +6.44
Futures now at 7:30am EST:
Key Data out today:
7:00: Mortgage Application (actual +3.2%)
8:30: Durable Goods Orders (estimate +1.6%)
10:00: New Home Sales (estimate 300k)
10:30: Crude Oil Inventories (estimate 362.7 mb)
12:00: Chicago Manufacturing Industry (prior -1.4%)
Since yesterday’s close, some key stories:
– Greek Yields sore.
– AFLAC third quarter soars on strong Yen.
– Mylan sales disappoint, shares fall.
– Nabors earnings better than expected, site U.S. land drilling.
– AK Steel posts loss, sees same for Q4.
– Broadcom revenue beats estimates.
– NYSE and Nasdaq short interest falls in mid-October.
– California borrows $6.7 billion cash JP Morgan- Led Group.
– Fed seen buying few hundred billion dollars in Treasuries.
– Moody’s- U.S. companies hoarding almost $1 trillion cash.
Significant Movers This Morning:
Trading Higher: BRCM +10.56% (earnings), FFIV 7.80% (earnings), NTGR +6.00% (earnings), EQIX +4.40% (earnings), CTV 3.40% (acquired by Carlyle), AMLN +3.30% (upgraded at Leerink), BWLD -6.20% (earnings), S -2.94% (earnings), CMP -2.90% (earnings), PNRA -2.80% (earnings)