Last month Bart Chilton, former head of the Commodity Futures Trading Commission who now works at legal powerhouse DLA Piper, wrote an op-ed in the New York Times alleging that high frequency traders make up about half the volume at the IEX, an exchange expressly created to remove the advantages that HFT has everywhere else.
“This is false: While high-frequency trading firms are estimated to generate 50 per cent or more of the volume on other stock markets, on IEX, high-frequency trading firms currently make up less than 20 per cent of our volume,” writes IEX CEO and Flash Boys protagonist Brad Katsuyama in the The New Zealand Herald.
Chilton cites ‘market participants’ for IEX claims
Chilton cites ‘conversations with market participants’ for his number, but that could include plenty of interested parties including HFT firms themselves. Besides, now that Chilton has left his role as industry regulator for one of the world’s biggest law firms (followed by his former CFTC colleague Elizabeth Ritter today) he is at least partially representing client interests himself.
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That’s not to say we should automatically believe Katsuyama either, but if Chilton has some evidence that the IEX really is reliant on HFT for trades to happen he should make it public instead of making offhand comments at the New York Times. Besides, Katsuyama’s stance on HFT has gotten overblown since Flash Boys was published. In today’s article he talks about allowing “the HFT crowd to define itself,” and IEX chief strategist Ronan Ryan has defended HFT, calling the IEX ‘pro-fairness’. What would be even more important is finding out whether the activities IEX is supposed to prevent are still happening on its exchange.
Chilton’s op-ed conflates HFT with electronic trading
The deeper problem with Chilton’s op-ed is that he continues a trend of HFT defenders conflating all types of electronic trading, when critics are trying to home in on specific practices.
“Speedy electronic trading is deeply entrenched in modern financial markets and investors’ orders aren’t being filled without them. In today’s world of global stock trading, high-frequency trading results in highly frequent liquidity,” Chilton writes. Electronic trading is great for improving price efficiency, but it doesn’t need layering, spoofing, momentum ignition, or a host of other tactics to make that happen. Here’s another good example:
“Even though the New York attorney general’s complaint and the general public conversation use demonizing words like ‘predatory’ and ‘toxic’ to describe high-frequency trading, study after study has proved that modern markets are cheaper and safer than ever before,” writes Chilton, ascribing all the benefits of electronic trading to HFT. Chilton says that he wants HFT reform without demonizing the industry, which sounds great, but putting everything into the same basket doesn’t help that cause.