Since Michael Lewis published his book on high frequency trading, ‘Flashboys’, and told America that the market was rigged, it became clear that there are a lot of people on Wall Street that don’t even think the topic should be discussed.
The market isn’t even close to being “rigged”, they argued, and if anyone’s losing any money on this it’s just pennies — so move along, nothing to see here at all.
That hasn’t stopped the government’s inquiry into the practice, though, and Tuesday morning Brad Katusyama, CEO of stock exchange IEX and subject of Lewis’ book, testified before the Senate Committee on Investigations about it. During his testimony, he gave the perfect response to the people that would rather toss the matter aside too.
“The size of the conflict compared to the notional amount traded is not a reason to ignore the issue,” he said. “I think it’s significant in the fact that it’s a principle based issue… you can try to minimize it using pennies… [but] it comes down to the foundation of why the markets exist and people’s trust in those markets.”
It’s the principle of the thing — do we just sit back and let some people have a (maybe tiny) advantage in the market, even though we know it’s there? Or do we strive to make the market as fair as possible so people want to invest?
As Jamie Dimon might put it, a constant fight for the most fairness is why we have “the widest, deepest most transparent capital markets” in the world (if you’ve never heard him say that, you’ve never heard the guy speak in public).
“The market’s responsibility in our view,” he said, “is to ensure that when a trade happens, the conditions with which the trade happens are fair… As technology has evolved the technology should have also evolved to maintain this fairness… “
But it hasn’t, he continued, instead it has enabled some people to take advantage of other actors in the market.
Katsuyama admitted that the use of the word “rigged” gave his critics a reason to shift the conversation, but he chalks that up to “people embedded in the status quo [who] don’t want to see change happen.”
But it’s going to happen, and he suggested that Congress start with a controversial practice called ‘maker-taker’, a practice that gives people who make trades (or provide liquidity to the market) and charges people who take trades.
Some exchanges have argued that if you eliminate that practice, there will be less liquidity in the market. But Katsuyama disagrees, and thinks we should test that theory.
“I think that steps should be taken to address what happens to the market if it’s [maker-taker] eliminated… it should be given the chance to prove that eliminating maker-taker won’t harm the market.”
So is anyone afraid of a little experiment?