Robot Monopoly!


According to an article in Bloomberg’s BusinessWeek, Knight Capital Group  this week expects to receive acquisition proposals from possibly two other powerhouses in high frequency trading – Getco and Virtu. Recall that following Knight’s August 1st 2012 algo-trading debacle, they were rescued by several firms to the tune of $400 million – one of those firms being Getco.

This is notable, as it highlights the trend away from having many different and diverse market makers at the New York Stock Exchange (NYSE). Consider this: as recently as the year 2000, there were twenty five different NYSE specialist firms making markets at the NYSE. Today, that number is six (Barclays, Getco, Virtu, Knight, Goldman Sachs, and J. Streicher) and still trending lower – should Knight sell its DMM operations to Getco or Virtu, over 50% of all volume and perhaps as much as 95% of all quote traffic will belong to just five firms.

Getco has been expanding steadily on the NYSE. In 2010 they purchased the right to handle 350 stocks from Barclays. In December 2011 they agreed to buy Bank of America’s NYSE market making business.

Not so long ago corporate issuers were concerned with, and had input into, who the specialists were who made markets in their stocks. There were specialist road shows, and specialists went to great lengths to convince these corporate issuers that they uniquely could maintain the most fair and orderly market for their stocks. Today these issuers have obviously less choice, and today they bear witness to how easily their stocks can spike up or down 2% or more, and back, within a second.

Is the trend towards having ever increasing portions of global stock trading being touched by ever fewer large powerhouse firms good or bad? Is anyone monitoring this trend? Are monopolies and cartels good or bad? What do you think?