Three significant articles appeared over the weekend that we want to draw your attention to (well maybe two of them are significant, and one of them “not so much”). The articles highlight how important our market structure issues have become.
First, the New York Times featured a story on the front page, above the fold, titled Clamping Down on High-Speed Stock Trades. It summarizes much of what we have been sharing with you these past few years.
Our take: High Frequency Trading, the exchanges that enable them, and our Market Structure are becoming a political hot potato.
Major points from the article are as follow:
1. Regulators are worried that as HFT spreads around the globe, it is making market swings worse. They worry that the unknown dynamics of HFT can make the market “spin out of control”.
2. The cost of HFT is the confidence of investors in the market.
3. The HFT guys say that most of HFT is legitimate, and that their presence means many more buyers and sellers in the market place, which reduces trading costs (spreads).
4. HFT has expanded into other markets and asset classes around the globe.
5. The SEC has been looking into HFT for two years.
The article also links to a July NYT article: High Frequency Trading, which detailed how HFT firms have formed lobbying groups that are showering Congress with money and hiring former SEC staff members.
Yesterday’s article also quotes BATS in saying that HFT has increased market volumes from 6 billion shares in 2007 to 8 billion shares today – a 33% increase.
We believe that covers up the real story, and wonder how much HFT increased volumes since, say, 2005.
Of course volume does not equal liquidity; Ask any fund manager, who needs to buy or sell one million shares, whether 7 firms trading between each other 100 shares 10,000 times, if that 100 share hot potato equals a million shares of liquidity!
Here is why this NYT article is significant. While it doesn’t say anything new from what we have been telling you, this is the second major front page story that the NYT has run on the issue. The first one was in July 2009, titled “Stock Traders Find Speed Pays, In Milliseconds.”
The second article we want to draw your attention to is David Hilzenrath’s detailed article on the SEC’s struggle to turn itself around under Chairman Schapiro. You can read that one in its entirety here.
Our take: Chairman Schapiro is under fire. The bungled Madoff investigation, BAC fine, Dodd-Frank tie-ups, and SEC new headquarter-leasing issue have distracted it from doing anything meaningful on the issue of high frequency trading.
Two major points from the article that relate to HFT are as follows:
1. “Armed with high-powered technology, direct access to stock market computer facilities, and special data feeds, these traders can detect big trades made by others coming across communication lines and act on them within milliseconds or less, some experts say.”
2. The SEC has still not acted on its own proposal to band flash-type orders. “Asked to explain the delay, SEC spokesman John Nester said the agency staff has been busy working on many rules.”
Again, our takeaway is that this was a very high profile article in a very high profile publication raising the visibility of our market structure issues.
Finally, the Wall Street Journal just published an article titled “Does High Speed Trading Hurt The Small Investor?” It is for the most part a pro-industry piece that highlights front and center Professor James Angel, Direct Edge board member.
Our take: Read the article if you want to read about how executions are faster nowadays, and spreads are narrow, now that the HFT firms bring so much volume to the table. Or you can wait for the DVD.
So wow. The New York Times, The Washington Post, and the Wall Street Journal.
I guess the HFT “hot potato volume” outlined in the SEC’s Flash Crash Report now has become a political hot potato in Washington DC. The heat is rising, and perhaps it may just be that it is more politically dangerous to ignore the issue in Washington now, than to actually offend the lobbyists and their HFT and HFT-enabling clients. Stay tuned!