This post first appeared on Floating Path.
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
In a letter to the SEC, Citigroup Inc (NYSE:C)’s head of U.S. equity trading Daniel Keegan, proposed a one year pilot program allowing for stocks to trade in wider ticks. The fundamental idea behind using wider spreads would be to incentive market makers to provide real liquidity where it is actually needed. The current penny and sub-penny spreads are dominated by high frequency trading market makers with little incentive to create fair and orderly markets in less liquid stocks. Wider ticks could be the solution.
“The market for small and micro-cap stocks dried up,” said Tom Carter, managing director at JonesTrading Institutional Services LLC. “When you get a lack of liquidity, it creates more volatility.”
“The goal for any market structure change is to bring back fundamental buyers and sellers,” said Jeffrey Solomon, CEO of Cowen & Co., “Institutions have vacated that space, and the reason is that it’s really hard to move blocks [of shares] in meaningful size in the current market structure.”
On the surface, the plan has merit and Citigroup Inc (NYSE:C)’s proposal seems quite benevolent given their high frequency trading division. However, as Themis Trading pointed out, there lies a large caveat in Wall Street’s version of the pilot program.
In its letter, Citigroup recommends that “it should allow for registered market makers handling retail order sending firms’ orders in the marketplace to trade at various levels within the wider spread, offering an opportunity for price improvement to incoming orders.”
In doing this, the proposal would allow a broker’s internalizers to execute trades inside displayed quotes. This is essentially the “price improvement” and “liquidity provisions” that HFT firms continue to falsely claim they provide.
..we strongly disagree with Citigroup’s third experimental bucket. Allowing internalizers to offer sub-penny price improvement defeats the entire point of a wide-tick program. Wide-ticks are supposed to encourage the display of liquidity and reward the investor who displayed the quote with a fill.
So while it may be too early to decide how the program will help investors and companies looking to raise capital, we must wait to see how, when and if it gets enacted.