HFT Lobby Position Paper on Market Structure – and Trojan Horses



It is quiet out there:

There has not been a major market structure failure in 2014, or at least anything of the magnitude of the 2010 Flash Crash, 2012 Knightmare, or 2013 NASDAQ Flash Freeze.

It’s been a while since we heard anything about AG Schneiderman’s dark pool and smart order router probe, or about progress on his Barclays action.

We have heard precious little from the SEC, since their daily parade of “market structure is of paramount importance” speeches in the wake of Michael Lewis’s Flash Boys.

The S&P has risen 7% this year in a low-volume and low-vix environment.

IPOs have not had a year like this in a decade.

Trading desks have been quietly laying people off, due to lack of order flow to trade.

It is precisely in this type of environment that experience has taught us to be on the lookout for something major to surface.  It is also precisely in this environment that we have come to expect droning propaganda to pop up, especially from lobbyists interested in defending the status quo in our modern market structure.

Take, for example, the efforts of Modern Markets Initiative (MMI), and the Future Industry Association Proprietary Traders Group (FIAPTG). The FIAPTG has put out a paper worthy of your reading titled Equity Market Structure Position Paper. They not only want you to read it; they especially want lawmakers and policy makers to read it. This is why their lobbying dollars have been spent to place their position paper in the Washington DC must-read blog – The Hill.com.

The FIAPTG and MMI want you to think they are not defending a lunatic market structure that thrives on fragmentation, immense conflicts of interest, and unwanted intermediation. No – they want you to think they are reasonable people that have investor interests at heart. This is why they say things that sound innocuous, like:

“Right now, it’s as if we have a brand new engine in an older car—we’re driving along just fine, but we could improve our performance, handling, and safety if we upgrade the vehicle itself.”


“Quantitative analysis of reliable data is the only way to determine which policies will be most beneficial for our markets and everyone who trades and invests in them.”


“We hope to improve transparency, reduce market complexity, enhance data availability, and promote fair access to our markets.”

We read those quotes, and we say to ourselves, “yeah… that is reasonable; I can get behind that.”


But as these lobbyists drone on with reasonable-sounding generalizations that mean nothing without actionable detailed reform, the HFT firms behind them, and the trading venues that enable them, continue on perverting marketplace rules.

For example – these firms say the SIP should be modernized and sped up, yet the trading firms still write code that systematically picks off your order flow in slower pools. They have “dark pool trading strategies.” And your order flow is routed by brokerage firms to their own pools, and outside ELPs, where the broker knows that your flow is all too often disadvantaged (ask AG Schneiderman, or ask Tabb Group’s Clarity Group)

Another example – these firms say they do not like fragmentation, just as you do not, which is they want the regulators to “re-examine the concept of protected quotes”.  They know full well that the way to get rid of fragmented venues that would not competitively survive without the regulators’ help is to ban payment for order flow. Yet instead they prey on your dislike of fragmentation, and use it do advocate for the removal of the ban of locked and crossed markets.

Another example – they bemoan complexity, because they know it is a hot button for all of you, and for investors in general. Yet they thrive on that complexity and further it along. NYSE is still submitting proposals for silly order types, and so is BATS with their Supplemental Peg Order.

Another example – these firms stress that we all need data to back up any regulator-mandated reform. Yet they know full well that the SEC’s MIDAS is woefully inadequate, as it captures only 15-25% of the activity in the marketplace, does not include all the data on order types used and other enriched data feed content, and does not track back to the user level. And they know that the Consolidated Audit Trail (CAT), which was proposed 4 years ago, is still a like number of years away from being implemented.

And they urge the SEC to create a Market Structure Advisory Committee to “facilitate dialog and encourage industry engagement.” You can bet that on this committee will be these very firms, exchange and dark pool representatives, as well as maybe a buy side firm or two that depends on ETFs for their revenues. It is doubtful that you will see the voices of reform on such a panel.

The FIAPTG and MMI enjoy putting out pieces that say generally benign things, and reasonable things. They want you appeased. But they know full well the devil is in the details – every time.


You know the challenge involved in getting your own data from broker dealers, SORs, on where your orders get executed – AND ROUTED. You know that the concept of someone selling your orders and intentions for profit to speedy third parties who want to trade against them, does not pass the reasonable person smell test. And sadly you know that you are all tired of having these debates.

Friends, enjoy the quiet. Enjoy the generally robust market (with regard to price level). Enjoy football season. Enjoy the MLB playoffs.


But be wary of those who speak out of both sides of their mouth, and who hide in Trojan horses.