There was fear of a knee jerk response that could harm, or even end their business. So Securities and Exchange Commission Chair Mary Jo White’s comments this week at the Sandler O’Neill Global Exchange and Brokerage Conference were much anticipated.
The early response has been very positive by the folks who had a target on their backs: high frequency traders. Ari Rubenstein, CEO of proprietary trading firm Global Trading Systems (GTS), says, “We are very pleased that she is taking a measured data-driven approach to this—there is a parent in the room.”
Rubenstein is referring to White's speech: “I set out last fall certain fundamentals for addressing market structure policy. One of those is the importance of data and empirically based decision-making,” White said, adding, “Empirical evidence shows that investors are doing better in today’s algorithmic marketplace than they did in the old manual markets.”
This is the type of thing market participants have been saying ever since “Flash Boys” was released but has been received with a great deal of skepticism from the media and everyone who had the term “rigged markets” burned into their memory.
Keith Ross, CEO of PDQ Enterprises LLC., was happy that White specifically rejected the “rigged” rhetoric and added that there was great depth to the plan she rolled out.
“I think there is some teeth to this,” Ross says. “They are going to take a very measured approach. Make sure everything is data driven and they are not going to be pushed around by the hype.”
That was a common theme from market participants, which should not be a surprise from people making a living by designing algorithmic trading strategies. For them data is everything.
White cited many of the same statistics HFTs have in defending the market. “The costs of executing large orders, measured in terms of price, were more than 10% lower in 2013 than in 2006,” White said. “The spreads between bid and ask prices for the broader market also are as narrow as they have ever been. These narrower spreads are particularly important for retail investors because they reflect the cost of trading immediately at the best prices, which is generally the objective of retail investors.”
She concluded, “All of these market quality metrics show that the current market structure is not fundamentally broken, let alone rigged. To the contrary, the equity markets are strong and generally continue to serve well the interests of both retail and institutional investors.”
White would go on to cite market structure problems and suggest potential solutions. This of course was also well received in that most market participants acknowledged that there were bad practices out there but put the blame on market structure issues and not squarely on HFTs.
Ross was particularly pleased to hear White would examine Reg NMS. She said, “We will be considering whether the SEC’s own rules, such as the trade-through rule of Regulation NMS, have contributed to excessive fragmentation across all types of venues.”
It is not often you here a regulator consider that they may have been part of the problem.