Yesterday, SEC Chairman Schapiro testified before the Senate Subcommittee on Securities, Insurance, and Investment (Chairman Schapiro testimony) . In her Market Structure remarks, she had this to say:
“As highlighted by the events of May 6, the current structure has many potential issues that should be studied and addressed where appropriate. High-speed, algorithm-driven electronic trading has increased the risk of sudden liquidity imbalances that can lead to disorderly market conditions and unexpected volatility. The continuing growth of trading in dark pools and other types of dark venues can challenge the quality of the market’s price-discovery function. And the complexity of the market structure sometimes makes it difficult for even sophisticated investors to pursue their own best interests.”
“Sudden liquidity imbalances”, “challenge the quality of price discovery”, “difficult to pursue their best interests”…..what happened to high frequency trading shrinks spreads and adds liquidity. We are glad the Chairman hasn’t been swayed by all the lobbyists running around DC. And we hope that she can solve her budget issues and move forward with market structure reforms like the Consolidate Audit Trail and the Cancellation Fee.
In addition to the Chairman’s remarks, we also recently stumbled on some very interesting comments from Morningstar. In a very well balanced piece titled “Market Structure Arbitrage” Click here for Morningstar piece, Morningstar eloquently details many of the issues facing our market structure today. They highlight high frequency trading practices such as liquidity rebate trading and latency arbitrage and even quote from a Themis Trading white paper (yeah, that’s one reason why we liked this report). There were quite a few strong statements in the report including:
“In stark contrast to statistical arbitrageurs, true high frequency traders ignore both economic theory and the underlying characteristics of the instruments they trade, instead gleaning profits from the structure of the markets they trade in at the expense of retail investors or the institutions trading on their behalf.”
“(Co-location) creates an arbitrage opportunity, allowing the high frequency trader, who can trade in microseconds to trade ahead of an institution and pocket the difference.”
“It’s unlikely that high-frequency traders taking advantage of our current market structure inefficiencies are benefiting investors.”
“Transparency is the answer to the high=frequency trading dilemma.”
As we have said in the past, there are times when we feel like nothing will ever get changed with our market structure and HFT will continue to dominate both price and volume. But then when we read comments from the likes of Chairman Schapiro and from Morningstar, we realise that we are not alone and that there are lots of frustrated investors who are starting to demand change. We will keep up our end of the fight and continue to highlight these issues and we hope that every investor who is not satisfied with our current market structure continues to voice their concerns.