“Principal” Matters


The amount of news flow surrounding HFT over the past few weeks is mind-numbing.  It seems like everybody has an opinion now of HFT and isn’t afraid to share it.  Don’t get us wrong, we think the debate is healthy but we hope it’s not just a media spike that will fade once the next hot news story breaks.  We also think the some very good informed opinion pieces may be getting lost with some of the noise out there.

One such piece was written yesterday by Jim McCaughan of the Principal Financial Group.  Jim is no stranger to the HFT debate having spoken out publicly and written numerous papers on the subject. We even featured a quote from him in our book, Broken Markets  , where he took direct aim at HFT’s. Jim is also certainly not a novice in the investment community and runs a firm that manages over $300 billion.  So when a guy like Jim McCaughan has an opinion on HFT, we consider this well-informed and something that we should be paying attention to.   Here is what Jim and Principal Financial have to say about HFT:

Our long-standing position, in published papers and conversations with regulators dating back to 2010, has been that HFT firms’ predatory practices harm to long-term investors and undermine trust in markets. Transparency and fairness are critical to the effective functioning of markets. And it is essential that markets are organized in a way that encourages all investors to trust that they will be treated fairly.

Jim specifically takes issue with sponsored access, colocation, high order and trade cancellation rates due to pinging and information being passed to HFT’s for a fee.  And unlike many pieces that you have probably read over the past week, Jim shares a number of recommendations on how to fix the problems including:

– Prohibition on exchanges paying for order flow.

– Action against predatory use of order cancellation. One approach could be imposition of messaging fees.

– Restoration of the uptick rule.

– Restriction on information use within dark pools and other trading venues.  Additional controls are needed to ensure operators don’t use privileged information to their own advantage.

– Action against sponsored access and co-location.

We think Jim and Principal have hit the nail on the head with their reform suggestions.  We would just add that we think there also needs to be action taken on the exchange direct data feeds with respect to both dissemination speed and content.  For more on Jim and his views, listen to the first five minutes of this Bloomberg Radio interview ​ that he did with Tom Keene.

While bloggers and pro-HFT types continue to try to distract the market structure debate and vilify Michael Lewis, institutional voices are speaking up and are being heard.  The pressure is now on the regulators to do something.