HFT Market Makers Are Holding The Equity Market Hostage
That whining you hear is the HFT community once again complaining that they are not being treated fairly. They can’t understand why they are under so much public scrutiny even after sponsoring so many “academic” studies and even after all the time and money that they have spent lobbying. The latest
rant comes from a European HFT executive:
Remco Lenterman, managing director of Dutch HFT firm IMC and chairman of the European Principal Traders Association, the HFT lobby group launched in June, told Financial News: “The rhetoric regarding HFT has now become so fierce and the measures being proposed are so draconian that they will be immensely damaging to the marketplace and far more so than they would be to HFT firms.”
Lenterman said: “So much of what is being thrown at the industry is anecdotal at best and fabricated at worst. The academic evidence that supports the benefits of HFT is overwhelming. Unfortunately, we are in a political climate where that evidence is not relevant.”
If you are not familiar with IMC, they are a European HFT market maker and one of the four founding members of Europe’s HFT lobbying group. Last year in a FT article , they explained what they do:
“Essentially, a market maker provides liquidity, which we believe is positive within financial markets, if not a fundamental condition of them. Speed is an essential tool for market makers to manage risk by controlling the amount of time that their quotes are placed on an exchange. This is commonly referred to as exposure time. It is clear that in the past 10 years, major markets have become substantially more liquid with narrower spreads and lower transactions costs. Speed has played an essential role in this development.”
It’s all about speed to him. Mr. Lenterman is complaining that there is no evidence against him that says he is doing anything wrong. In a court of law, he would probably win his case since there the regulators have yet to figure out a way to piece together the fragmented trail of the HFT’s. But this is not a court of law, it is the court of public opinion. And the investing public knows what is going on. Mr. Lenterman and his friends enjoy many benefits that regular investors do not have such as colocation, access to enhanced data feeds and the best machines and programmers that money can buy. But these market makers have no real obligations and their quotes could disappear in a nanosecond.
But here is the real problem. After a decade of misguided regulation where exchanges have sold out to become for-profit corporations, we have been left with a mere shell of an equity market. Mr. Lenterman and his friends will claim that spreads have never been narrower and liquidity has never been better. By now, all of you know, these are empty statements. The slightest hiccup in the markets and these new “market makers” will go running for cover. They are not there to smooth the flow of capital, they are there to make a profit for themselves. In a twisted sort of way, IMC may be right about the effects on the market. What would happen if IMC and their HFT market makers friends were to shut down their machines? The market has become addicted to their fleeting liquidity and no longer has any alternative. Real market makers and capital providers have been driven out of the equity market because of a lack of economic incentives. The HFT market makers have filled the gap but as we have seen before (May 6th), they will likely run when the going gets tough. Has the market gone too far in the electronic trading direction? Have we now become hostage to the HFT market makers? We need an alternative to this high speed highway so we can escape from being held hostage by the HFT’s. We need real liquidity providers to be incented back in the market.