A leading spokesperson for the high frequency trading (HFT) lobby encouraged regulators not to “throw the baby out with the bathwater,” while acknowledging that “we know there are issues and the small number of bad actors should be addressed.”
Transaction costs at historic lows
“We have a structure that has lowered transaction costs to the lowest point in history,” said Peter Nabicht, policy advisor to the Modern Markets Initiative, which is an education and advocacy group supported by the high frequency trading industry. Nabicht makes it clear he has no issues with the trading practice of high frequency trading, just that “it is how someone is using it that can be bad – as is the case with all trading practices.”
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Nabicht, who traded in the pits of Chicago and rose to a top trading position for a leading HFT firm, said manipulation of markets is a significant issue that should be addressed. “Manipulation or spoofing hurts all legitimate market participants and those doing it should be removed from the markets. If you do many of the firms using HFT will be the first to stand up and cheer. But don’t throw out what is working with what needs to be addressed.”
HFT: Common ground on market manipulation, a key concern of all
“Spoofing” is a technique where speedy traders using a directional strategy to attempt to manipulate the electronic eye of the market making software. The goal is to “fake out” the computer and move the market in one direction or another. The ultimate success of this strategy is a matter of debate, with HFT advocates saying that high frequency firms cannot easily move markets without fundamental supply and demand coming into play. Detractors point to a number of market moves that significantly involved HFT firms. Some claim that the official regulatory flash crash report failed to accurately portray the role HFT played in exacerbating the flash crash, which occurred four years ago yesterday. Charges have been made that the report was written so as not to shine a negative light on HFT, but Nabicht doesn’t think it is an issue. “Both pro and anti HFT folks have issues with the report. The flash crash report wasn’t perfect, but what is?” Nabicht responded. “It’s not worth being upset about. Instead of being upset we should focus on getting things right and fixing possible issues”
Expel “bad actors”
Speaking at a Tabb Group event and later in an interview, Nabicht advocated everyone getting involved in market structure debate. “The bad actors engaged in manipulation should be expelled from the industry,” he said.
A significant issue Nabicht acknowledged is transparency. Many of the stock dark pool trading venues do not publish their trading rules, which is an issue in Nabicht’s eyes that should be addressed. “The rules of the road at every trading venue should be public so that all can know and understand them. Similarly, it makes sense for payment for order flow to be fully disclosed and well understood.”
When asked if HFT was a game only those with multimillion dollar technology and co-location budgets could play, he drew distinctions. “Playing the speed game between Chicago and New York is expensive,” Nabicht acknowledged, “And trading a speed game in the equity markets with dark pools is expensive, but if it is required by your strategy then the investment is available to you. But renting a co-located server and only trading the derivatives markets (which are less fragmented) is not prohibitive for a firm.”
Another issue with HFT is allowing display of a price quote that is conditional on the HFT firm receiving a cash rebate from the exchange. This manifests itself when a certain price for a stock is advertised and when the investor goes to purchase the stock they cannot access the advertised price. This and several other issues remain points of contention.