Does it really matter?


Does it really matter?  Do all the structural problems that exist in the stock market today really matter?  If you talk to some of the stock exchange executives, they will claim that it doesn’t matter.  They will say that trading has evolved and investors have never had it better.  Of course, they want you to think this since their conflicted business models rely on you not asking questions about their never ending rule changes.  They don’t want you to look at the insanity of their fee schedules  which are tailor made for the high frequency trading community.  We’re sure that some of these smaller stock exchanges wish they never applied and received approval to become an exchange.  It was so much easier for them when they were a private ATS and didn’t have to be subject to the spotlight of market observers.  But then they never would have received the slice of the $500 million dollar market data revenue pool that the exchanges get to divide up amongst themselves every year.

So, does it really matter?  Institutional and retail investors think it matters.  As evidence of this, we point to a just released research note, titled Trading Issues”, from Birinyi Associates.  Laszlo Birinyi and his team have put together another excellent piece which explains why the structural issues in the market should not be overlooked by investors. The report details and is very critical of  the mini-flash crashes that we see happening every day in the US equity market  From the Birinyi Associates report:

“Most investors have been tolerant of the excesses as it is generally accepted that trading today is “faster, better, and cheaper.”  While many academics endorse the conclusion, we disagree.  Our experience as a trader and as an analyst leads us to reject the accepted measures of trading costs on both pragmatic and intellectual levels.  We believe that in a world of fragmented markets and electronic trading it is impossible to determine market impact.”

“Furthermore, anecdotal evidence does not support the equation where exchanges pay billions for order flow, high frequency traders and proprietary traders consistently make money and the customer also benefits?”

“Commissions are without question lower, executions are faster but we question the thesis that trading costs are lower.  True trading costs or market impact are impossible to determine in the world of HF, fragmented trading. “

“A more immediate concern, which is becoming more and more manifest, is an increasing deterioration in the execution process.”

So, does it really matter?  You’re damn right it does.