"HFT Is A Growing Cancer" Says Mom And Pop's Favorite Retail Broker Charles Schwab
Submitted by Tyler Durden on 04/03/2014 09:58 -0400
On one hand CNBC does its darnedest to refute Michael Lewis' claim that markets are rigged (even if it woefully does so by showcasing the most clueless "defenders" it can afford), and yet on the other "mom and pop's" preferred retail broker Charles Schwab, just came out and slammed HFT as a "growing cancer that needs to be addressed." Hmmm.... who to believe?
From Charles Schwab:
High-frequency trading is a growing cancer that needs to be addressed
April 3, 2014
Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.
High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.
On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.
As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.
The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.
High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.
Here are examples of the practices that should concern us all:
- Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
- Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
- Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
- Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.
There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.
The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.
Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO
Walt Bettinger, President and CEO
BATS Admits CEO Lied About HFT On CNBC
Submitted by Tyler Durden on 04/03/2014 19:35 -0400
It is now quite clear why BATS CEO Bill O'Brien was so agitated during the Tuesday's screamfest on CNBC. As The Wall Street Journal's Scott Patterson reports, under pressure from the NYAG,BATS has hurriedly issued a statement correcting the CEO's false comments during the exchange with IEX's Brad Katsuyama. After Katsuyama said "you wanna do this, let's do this" clearly giving him an out, O'Brien stated that BATS priced its trades off 'high-speed' data feeds when in fact they price their trades off a much slower feed (and therefore 'enable' the exact HFT-front-running that is in question).
Here is the clip in particular where O'Brien lies following Katsuyama's question... that BATS uses the high-speed feed to price its trades...
The exchange in question...
“What do you use to price trades in your matching engine on Direct Edge?” Mr. Katsuyama asked Mr. O’Brien.“We use the direct feeds,” Mr. O’Brien said.Mr. Katsuyama, whose IEX dark pool markets itself as a haven for investors against high-speed traders, later brought up the issue again.“You use the SIP to price trades on Direct Edge,” he said.“That is not true,” Mr. O’Brien said.
But as The Wall Street Journal reports, it was true
BATS Global Markets Inc., under pressure from the New York Attorney General’s office,corrected statements made by a senior executive during a televised interview this week about how its exchanges work.BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.The distinction matters because high-speed traders can use powerful computers and superfast links between markets to outpace traders and trading venues that rely on slower market data, such as the SIP.
Full BATS Statement below:
Clarification Regarding Market Data UsageApril 03, 2014BATS Global Markets wishes to clarify the market data usage of its exchanges. With respect to routing, EDGA & EDGX use direct depth-of-book data feeds for all major exchanges, and data from the relevant securities information processor (SIP) for certain smaller exchanges. With respect to the matching engine, EDGA & EDGX currently use the SIP, but will be transitioning to direct feeds from all major exchanges in January 2015. BATS BZX and BYX exchanges currently use direct feeds for both routing and its matching engine from all major exchanges, and SIP data from certain smaller exchanges.
This leaves us with two possibilities, either:
1) The CEO of BATS has no idea what his firm actually does and is merely happy to earn an impressive amount of money skimming off the rest of the population of market traders no questions asked, or2) The CEO of BATS is a liar and is merely happy to earn an impressive amount of money skimming off
the rest of the population of market traders no questions asked.
Sick And Tired Of Being Frontrun By HFTs? Interactive Brokers Has A Solution
Submitted by Tyler Durden on 04/03/2014 13:30 -0400
The real backlash against HFT begins:
- INTERACTIVE BROKERS TO OFFER CUSTOMERS ACCESS TO IEX: CNBC
- INTERACTIVE CUSTOMERS CAN SPECIFY TRADE BE DONE VIA IEX: CNBC
And from CNBC which broke the news:
Interactive Brokers is launching a new service that will for the first time allow retail investors to specify that their orders only go on the new IEX trading platform.IEX, whose founder Brad Katsuyama is the core character in author Michael Lewis's new book "Flash Boys," has said that its structure is designed to keep high-frequency traders from getting ahead of others' orders.IEX, which some have called an exchange, does not post public prices and as such is more like a "dark pool" for private trading.Interactive Brokers is an online discount broker perhaps best known for its founder and CEO, Thomas Peterffy, the Hungarian-born billionaire who stars in the brokerage's commercials.
Should the HFT lobby be worried? Yup.
This is how the Goldman-backed IEX exchange proceeds to slowly take over lit markets, and take all important frontrunnable order flow - the lifeblood of HFTs of course- away from the vacuum tubes.
More about IB here: