Anatomy of a Conflicted HFT Study

Industry lobbyists are very good at spinning words and data in a way that makes it easy for policy makers to digest. They usually know exactly which buttons to push to either defend the status quo or to lobby for a rule change that would benefit their clients. The latest report from the HFT lobby, known as the Modern Markets Initiative, is a perfect example of how to convince policymakers to do what you want them to do. Here’s an anatomy of this latest conflicted HFT study.

Step 1 – Have an attention-grabbing title with lots of buzzwords. MMI named their latest report: A Report on Market Automation and Dependable Liquidity in Times of Uncertainty: Investor Savings from Narrowed Bid Ask Spreads, Markets Functioning as Intended

Step 2 – Issue a press release with a title that is sure to catch the attention of policymakers and their staffs as well as some friendly media. The MMI press release was titled “New Study Shows Modern Trading Technology Allows Workers to Retire Two Years Sooner”

Step 3 – Stick to your talking points and twist the facts into what you want the reader to believe.

Let’s take a look at some of these talking points:

1) Most people would agree that electronic trading and decimalization have brought down cost of trading and made it more efficient.  The MMI paper starts out by first talking about the benefits that electronic trading and decimalization have brought to the market. 

“More recently, data has shown bid-ask spreads shrinking by more than 50% over a decade in the mid-2000s and mid-2010s. Much of the price improvement occurred during the rapid adoption of automated trading technology.”

2) Imply that “automated traders” are actually the reason trading costs have come down.

“Electronification initiatives, including automated traders, have played a vital role in driving down the cost of trading for investors.”

3) As you read further through the report, “electronic trading” starts to morph into “automated trading” as the authors try to claim automated trading has saved pensions funds money.

“Modern market technology, including automated trading technology, is projected to have saved a mid-size pension fund each year over $125 million in transaction costs.”

4) The report relies heavily on spread reduction as the source of savings. However, charts in the study show that most of the spread savings came after the move to decimalization in the early 2000’s. That doesn’t seem to matter to the authors as they attribute the spread savings to electronic market makers.

“Fierce competition between market makers, and electronification of the markets, has led to a dramatic reduction in spreads and in the cost of trading.”

5) Now that they have claimed the spread savings are the result of electronic market makers (who happen to be MMI clients), they start to go heavy on the standard marketing pitches that the HFT community likes to use when talking to regulators and lawmakers:

“What happened for bid-ask spreads to narrow so rapidly in the 1990s and 2000s onward? Rapid adoption of computerization of trading systems, automated trading technology, and regulatory reform coinciding with market automation. Notably, automated trading firms based in banking hubs all over the world in Chicago, New York, Texas, Amsterdam, Hong Kong, Israel, and Switzerland pioneered the field of utilizing algorithms and automated trading to conduct market making and supply liquidity.”

6) If you made it to page 13 of the 27-page report, you can see that the narrative continues to evolve into automated trading and not electronic trading has saved investor’s money:

“What is the net impact of all this automation and deployment of technology, as far as savings to retail investors? One must look no further than a snapshot at bid-ask spreads of a selection of stocks on a recent Q1 2021 date – March 12, 2021, to see the price improvement since the last selection from over a decade before.”

7) Use the word “democratize”. It seems like any industry insider report that is meant to be sent around the halls of Congress must have the word “democratize” in it.

“A proliferation of automated trading systems utilizing high speed trading has become available to retail investors, democratizing fast trading to retail investors where at the click of a button, and in many cases for free, the average investor can buy and sell stocks in a fraction of a second.”

8) Once you have convinced the reader that it was automated trading that has saved investors’ money, now use some cherry-picked statistics that friendly Congress people can quote at their next House Financial Services Committee hearing. It doesn’t matter if these numbers are made up, because once they are published in the report, they will likely be cited as facts by media and industry shills.

“Market automation (including automated trading, tech innovation at exchanges, ETFs, and regulatory reform) has had a positive impact on 401(k) and IRA holders across the United States. The rate of return of a 401(k) mutual fund with market automation is estimated to be 9% on average, while the rate without market automation is 8%. With the return rate difference, individual investors are projected to save $1,940/year (for 10 years) and $5,523/year (for 30 years) in reduced trading costs as a result of automated markets per year, for an average 401(k) portfolio or IRA plan with $100,000 in assets. The estimated savings of market automation over a lifetime of a 401(k) account of this size is a total of an additional $165,683 after 30 years more than the investor would have in his or her account without market automation.”

9) Finally, continue to push your main point that automated trading is helping pension funds even though some major pension funds sued the stock exchanges for providing low-latency tools to HFTs that were used to harm pension funds.

“Market automation (including automated trading, tech innovation at exchanges, ETFs, and accompanying regulatory reform to modernize regulation in response to innovation) has yielded cost savings to public pension funds through lower transaction costs.”

And that is how you create a report that will eventually be cited to support a future rule change or to defend a model that is being threatened by new regulations. Forget about the real facts and just twist everything to fit your narrative.