Themis Trading – June 3^rd, 2014

Opening Statement from CFTC TAC Panel on High Frequency Trading

Themis Trading is an institutional equities broker.  We trade solely on an agency basis for our institutional clients which include mutual and hedge funds.  In addition to trading, we have focused our attention on equity market microstructure issues. While some have called us HFT critics, we prefer to be thought of as market structure critics.  Years of regulations have helped create a fragmented equity market that currently is the focus of much debate.  This fragmentation has led to the creation of time and price arbitrages that many HFT strategies seek to exploit.

While we are not sure if any of these practices are illegal, it is clear to us that securities regulators lack the surveillance methods required to police the high speed, low latency stock market. Their recently adopted surveillance system, MIDAS, falls woefully short of what is needed.  The SEC has essentially admitted this deficiency by proposing the Consolidated Audit Trail (CAT) which is still years away from being built. Essentially regulators have come to a gunfight armed with a very dull knife.

While we acknowledge that HFT is hard to define, it is clear that many HFT strategies employ cross asset strategies including trading options, currencies, bonds and futures.  This new breed of high speed, cross asset trading has stretched the boundaries of traditional regulation.

While the SEC struggles with this own workload and budget constraints, it appears that the CFTC faces similar issues.

In his statement of dissent on the 2015 budget, Commissioner O’Malia said:

“While slightly more measured than the November request, this budget request perpetuates the futile strategy of hiring more staff to oversee a vastly complex, high-speed and technology-driven market. The lack of mission priorities makes these wide-ranging budget requests seem somewhat random and ill-defined – only because they are.“

Recently, the book “Flash Boys” brought the secretive and complex subject of high frequency trading to the public.  While some may dispute some of the books facts, there is no question that the book successfully achieved what we and many others have been trying to do for the past few years – have an open debate about our market structure.

We have heard numerous calls for a “top-down,” or “holistic” review of our market structure.  We submit this would be neither productive nor effective. Correcting the systematic unfairness in the market structure can be done simply, and without disenfranchising any key market participants.

The best solutions to complexity are usually simple ones. We have three that we believe can change equity markets for the better.

1)    Eliminate payment for order flow, whereby brokers sell their orders to a trading firm, along with the maker-taker policy, whereby exchanges provide rebates to traders for posting liquidity.  There’s nothing unprecedented in either of these suggestions, and markets can readily adjust and adapt.  Rebates are polluting the trading ecosystem with unnecessary incentives, and need to be done away with.

2)    Mandate complete disclosure of dark pool and smart order router practices. Without knowing how orders are routed and how dark pool policies factor in, it’s hard to determine whether they contribute to or detract from the market’s well-being and designated objective as a means of allocating capital.

3)    Regulate data feeds. Trading information should not be fair game to be made available by the exchange to the highest bidder. Exchanges should grant investors the right to opt out of having their data sold to trading firms, which can then track and act in advance on information.

There is no longer any reason to continue to create exploitable opportunities from unintended consequences.  What’s needed are straightforward solutions to fix current problems that provide exploitative opportunities and impair market liquidity.  Our markets need simple, straightforward solutions that provide fairness and that can easily eliminate inefficiencies and  complexity that hobble their fundamental purpose.