Three Breaking Market Structure Stories That You Should Know About


Three stories have broken over the last 24 hours that should be considered victories for market participants who are in favor of fair and less complex markets:

1) Stock Exchange Consolidation Has Begun

The CBOE Stock Exchange (CBSX) has announced that they will be “ceasing market operations at a date to be determined”.  You might recall in a note last week, we questioned the value proposition of exchanges like the CBSX that have sub-1% market share:

“These sub-1% exchanges add a significant cost to the entire industry while providing very little liquidity.  Connectivity fees, port fees, direct market data fees and regulatory fees are all factors that market participants must deal with when connecting to the 13 stock exchanges.  Does the cost of these exchanges outweigh their benefits? ”

While we will still have 12 stock exchanges (and an ADF), the CBSX announcement is a significant step in the market structure debate.  We have long called for consolidation of exchanges and are encouraged that more consolidation will follow soon.

2) Business Wire Agreed To Stop Giving High Speed Traders Direct Access To Their News Releases

After the Wall Street Journal (with significant help from Nanex) broke the story about certain news organizations selling their news feeds to high frequency trading firms, Business Wire has decided to cease the practice.  They issued a statement which could best be described as a mea culpa without the culpa:

The recent Wall Street Journal article and others have pointed out, there was nothing wrong in Business Wire serving these handful of HFTs directly. These traders had absolutely no time advantage in receiving material news from Business Wire…However, in discussions that have taken place with a few of our clients, we learned that the article may have caused some misperceptions, and that was of deep concern to us.”

Why does it seem that every time a questionable business practice which is related to HFT gets exposed the defense is always that it was a “misperception” or a “myth”? Why do HFT supporters constantly have to write pieces about how the media and certain brokers are perpetrating “myths”?  Maybe the answer is that these aren’t myths and misperceptions but facts that are trying to be covered up.

An interesting side note to this story is that Business Wire is owned by Warren Buffet’s Berkshire Hathaway.  The WSJ reported  that Warren Buffet was even consulted about the decision to stop selling access to high speed trading firms.  You may recall that Buffet’s deputy, Charlie Munger, is no fan of high frequency trading. In a 2012 interview with CNBC, Munger had these harsh words about rapid trading:

Take the rapid trading by the computer geniuses with the computer algorithms,” said Charlie Munger, vice chairman of Buffett’s Berkshire Hathaway, “those people have all the social utility of a bunch of rats admitted to a granary.”

We’re glad to see that Business Wire realized their mistake and took actions to correct it.  And we’re sure Charlie Munger feels the same way.

3) SEC Plans To Implement “Tick Size” Pilot Program

In a speech earlier today, SEC Chair Mary Jo White said:

One near-term project that I will be pushing forward is the development and implementation of a tick-size pilot, along carefully defined parameters, that would widen the quoting and trading increments and test, among other things, whether a change like this improves liquidity and market quality.”

We are very happy to see that Chair White and the SEC is supporting this proposal.  Now, it’s on to the design phase of the wide-tick pilot program.  Chair White has indicated that the SEC will design the program with “carefully designed parameters”.  In our comment letter on the subject, we “recommended that all trades executed in stocks that are in the wide tick pilot program only be allowed to trade at the bid and offer of such minimum wide tick increment, with an exception allowed for all participants at the mid-point between the two.”

We also believe that carving out an exemption for internalizers will undermine the entire pilot program.  The goal of a wide-tick pilot program is to encourage and attract displayed liquidity.  Allowing internalizers to jump ahead of this displayed liquidity for de minimis price improvement will discourage such displayed liquidity, and harm the price discovery process.