I wanted to collect my thoughts on the Senate Testimony today at 10AM. Apparently there will be a live webcast via this link: http://banking.senate.gov
As for my background, I have been an active trader since 1987, and manage over 5B in AUM. We are not market-makers and do not participate in high frequency trading of any type. However, we use computerized execution algorithms to adjust our portfolios each day in equities and futures markets around the world. Our average holding period is 7 days, and our minimum holding period is one day.
In order from most anti-HFT to most pro-HFT:
Mr. Lauer continues in the grand tradition begun by others that HFT constitutes a clear and present danger to our financial system. In my opinion he asserts inaccurate claims concerning the May 6, 2010 Flash Crash. Please see my blog post http://www.transparentsimplicity.com/2012/09/flash-crash-reactions-may-8-2010-so-i-dug-in-to-look-at-what-was-very-fast-action-in-a-classic-cascade-downward-across-a.html.
Interestingly, Larry Tabb (another Senate witness) addresses this type of hyperbole by listing 12 other non-HFT factors that might be contributing to declining investor confidence in the markets.
On the positive side, Mr. Lauer’s written testimony offers poignant arguments against burgeoning message flow, exotic order types, dark pool opacity, and absurdly short order lifetimes. In addition, the points about complexity’s role in creating unfair opportunities ring true across a far wider stage than just market micro-structure. I especially appreciated Mr. Lauer’s quite novel idea of open-sourcing the data and setting up a contest-like environment to “…find innovative ways of designing surveillance systems and algorithms.”
Andrew M. Brooks
Mr. Brooks echoes much of Mr. Lauer’s testimony, although in far more succinct form, and without the sweeping conclusions about HFT’s negative impact on the financial world. He suggests that pilot programs be used to test out various solutions to the major HFT issues.
Mr. Tabb’s testimony is much more descriptive of market structure and definitely is the most detailed and specific about the issues. I believe that his testimony is fairly even-handed and sober. He does state that our markets are overly complex, and goes into some details as to why that is a major problem. He writes at length about the issue of less liquid stocks and how the current market structure is tilted towards trading optimality for the stocks of the largest companies.
Two very interesting assertions are that “The current market structure benefits small investors” and “Day traders are completely disadvantaged.” As mentioned above, he goes into many reasons for dropping investor confidence that fall outside the scope of market structure. Instead of recommending that complex order types be banned, he recommends more transparency in the exchanges’ order descriptions. There are a lot more specific recommendations in his testimony.
Mr. Concannon works for Virtu, an electronic market maker. He cites complexity as an issue; so, unanimously, the witness panel agrees that our markets suffer from too much complexity. However, he blames what he calls “major regulatory reengineering events.” I am especially annoyed that he doesn’t mention the proliferation of order types that has played a huge part in un-leveling the playing field with unnecessary complexity. He calls for “… the need for additional obligated liquidity in our market.” Interestingly, most of the issues cited by the other panelists are not mentioned by Mr. Concannon.