The Real Story Behind The Recent Stock Exchange “Glitches”
Let the damage control begin. After taking a number of body punches yesterday for their thousands of Reg NMS and Reg SHO violations, BATS tried to defend themselves. Their CEO tried to calm the investment community concerns about the integrity of their exchange:
“This is part of the business of being an exchange in an electronic environment,” chief executive Joe Ratterman said in a Dow Jones interview .
BATS was also quick to blame certain rules of the market for their troubles:
“I think you could do away with a significant amount of complexity by simplifying some of the regulatory guidelines,” Ratterman said.
Apparently Mr. Ratterman was referring to the rule that requires a market not to be locked:
“The price-sliding is predominantly a reaction to the prohibition on locked markets,” Ratterman said. “It creates complexity in everybody’s systems. We’ve been advocating for some time we need an industry review of some elements of Reg NMS, primarily locked markets.”
We find it rather ironic that they are blaming the rules of the market for their mistakes. If it were not for Reg NMS fragmenting the market, the NYSE would probably still have 80% market share and we most likely would have never heard of some of these stock exchanges.
We see the recent stock exchange glitches a little differently. There are three main problems:
1- The for-profit exchanges have bent over backwards to help the high frequency trading community circumvent the rules of the equity market. They have helped create unnecessary complexity in the extremely fragmented equity market so that HFT’s can exploit artificial arbitrage opportunities. Rather than offer to remove the price sliding ability which caused the problem, BATS seems to be digging in to defend their existing practices. Of course, this same situation could be going on at the other exchanges but we have not had any voluntary admissions of rule violations from them – yet.
2- The regulators are not enforcing the existing rules of the equity market. How could an exchange violate Reg NMS over 400,000 times in a four year period and the SEC not catch this? The SEC took years to write Reg NMS but apparently they didn’t take the time to build any systems to enforce their rules.
3- Confidence – while this latest BATS glitch may not be statistically significant, it continues to erode investor confidence. While proponents of HFT will claim the media and “certain brokers” are scaring the public and these are only minor issues, we think the constant stream of bad news coming from the exchanges is the real culprit. They have made their own bed, now they have to lie in it.
Yesterday we were fortunate to go on CNBC and state our opinion of the latest market structure breakdown. Here is a link to the interview in case you missed it:
Brian Sullivan of CNBC had this to say during the interview which we think a lot of investors would agree with:
“Lack of confidence in the capital markets is the greatest cost of all.”
Unfortunately, we think we will be back on CNBC very shortly to discuss the next market structure glitch. All we can do in the meantime is continue to highlight the problems in the equity market microstructure.