Let’s Play Spin Doctor!




Modern Markets Initiative has been busy again! Sigh… I guess when you are a bought lobbyist, you need to do whatever it takes to advance your clients’ agenda – truth be damned. This past week Modern Markets has been busy pushing a new study that shows how “liquidity providers” lower your trading costs. You may be certain that lobbyists are running around the Rayburn House Office Building excitedly with this paper (and a checkbook). Here is MMI tweeting this “SEC Study” in the social media:

 Modern Markets @ModernMarkets

#HFT Liquidity providers lower investor costs. SEC Division of Economic and Risk Analysis Study modernmarketsinitiative.org/research-studi…


While last week, we debunked the new Brogaard study that yet again relied on a 5 year old NASDAQ ONLY data set, where NASDAQ told them what data was HFT and what data wasn’t (Big Banks’ and Brokers’ trades and orders were excluded, as were trades from sponsored access providers like Lime/Wedbush), this new piece of spin just takes the cake. Joe and I delved into the “SEC paper”, and while we were preparing our comments on it, R.T. Leuchtkafer graced us with his own commentary, and we decided to just share his commentary with you instead.

Those papers the industry was circulating the other day – “Automated Liquidity Provision” and “Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets” – are kind of interesting.

 First, they’re not new.  Not by a longshot.  I guess the FIA and Holly Bell don’t know that.  A version of “Automated Liquidity Provision” was first posted to the SSRN site in July 2010 and Liquidity Risk was first posted in December 2013.They are hardly new.

 Second, they’re both theoretical papers, where the authors build a model and discuss its implicationsThey aren’t empirical, data-driven, or evidence-driven papers, despite some claims that they are.

 Finally, Austin Gerig, a co-author on one paper and first author on “Automated Liquidity Provision” also wrote a paper called High-Frequency Trading Synchronizes Prices in Financial Markets, first posted in November 2012 and last updated in November 2013. The FIA and Holly Bell are pretty quiet about that one, with good reason.  In that paper, which DOES analyze market data, Gerig says things like the following:

 “HFT appears to make the financial system as a whole more fragile.”

 “The rapid fall and subsequent rise in prices that occurred in US markets on May 6, 2010 (known as the “Flash Crash”), was, in part, due to HFT.”

 “[D]uring times of market stress, HFT firms are impelled to leave the market if their systems observe events outside the parameters they are programmed to handle – a circumstance that causes liquidity to disappear at the precise time it is needed the most.


AND here’s what Gerig has to say about that NASDAQ dataset (which he uses in this paper):

 “The most likely bias in NASDAQ’s categorization is under-reporting of HFT. HFT activity that originates from large integrated firms, such as investment banks or large hedge funds, cannot be separated from the other activity of these firms and is therefore not categorized as HFT.”

 Of course the bias is worse than this, because in at least some versions of his papers Brogaard says sponsored access firms are also categorized as non-HFT, which could lead to a huge amount of HFT activity being labeled as non-HFT in NASDAQ’s data.

 What especially cracks me up about all this is when the chair of the FIA EPTG mocked what critics might say – (old data, limited data, biased data, authors want a job at HFT firm, comma’s inserted at wrong place, or that “It’s not an actual SEC paper” approach,”) -the author of the very paper he promoted has described Brogaard’s data as limited and biased! This is rich, indeed.

 And Modern Markets is promoting this paper as an SEC paper. Since the paper was first posted in 2010, years before Gerig was ever at the SEC, it really isn’t an SEC paper. If Modern Markets wants to insist it is an SEC paper, then by the same logic they should also hold up the other Gerig paper, the one that says HFT makes the financial system fragile and that HFT contributed to the flash crash, as an SEC paper as well.


 Thanks R.T. – We could not have highlighted and analyzed the Spin Doctors’ latest tack any finer!