Really? Again? Still?

Dan Keegan, head of electronic trading at Citigroup, said the above statement to the FT in this article, adding, “high frequency trading, broker-dealer trading, and retail trading is coming together.” He made this statement in the context of explaining the rationale behind Citi’s new planned dark pool, Citi-Cross, which it hopes to launch by year’s end. Citi’s intentions here mimic those of Knight Capital, which also announced plans for a new dark pool to be launched by year’s end (Knight already has a few pools, incidentally).

The article in the FT claims that studies have shown that retail investors frequently miss out on the best prices, as too many “policies” favor order flow going to the big exchanges. We, however, hardly believe there is a shortage of “exposure” of retail orders to the “best prices”. We do feel that there are far too many conflicted interests trying to get first crack at being the other side to the almighty retail order.

Why do they all want to have first crack at being the other side to the order?

First off, having a free option to transact at will, or not, with the retail order is valuable. But this option belongs to the retail order’s owner! We are still shocked that it has been taken from them and auctioned off to the highest bidders by for-profit execution venues, be they lit or dark. How is the retail order compensated, outside of .0001 cent price improvement?

Secondly, financial modeling and behavior prediction is a big money maker for the “liquidity providers”. They pay for enriched data feeds to help them model and ascertain what longer term orders are doing in the market. They all want a
chance to financially model and predict off of order flow that they pay to see. Do you think retail wants this to happen? Do you think they know it happens? Or do you think they believe that their orders are going to that place on CNBC to
get executed?

Consider what happens to a retail order coming from United Trade:

Retail Order ==> Sold to Internalizer (liquidity providing PROP HFT) ==> either executed for nonsensical price improvement (.0001), where it will be adversely selected against, or “exhausted” to the public quote by first traveling through conflicted routing, where numerous other venues get a crack at being the other side to the order ==> maybe makes it to the public market, like the NYSE, where it interacts with mostly HFT DMM’s and “Market Makers”.

This has been going on for years, except now the advertising to retail to trade on steroids has now expanded to currencies, futures, options, derivatives, currencies, and soon swaps. Gulp. Is Citi’s strategy new? Or is it more of the post-REG NMS same?

Does it sound to you like the retail order has a shortage of opportunities to get the best price in this wonderful penny-wide market we have? We would ask the Regulators to awaken to all the conflicts of interest but alas, we have already done that.