For years, since the introduction of algorithmic—and its evolution into high-frequency—trading, disgruntled investors, brokers and advisors have complained that these new, fast markets disadvantage traditional retail or institutional flow. Some do themselves no favors by mistakenly calling it front-running, while others point out the disparity between the ability of an investor calling their broker—or using one of many high-tech online trading tools—to execute in a timely and competitive manner against firms with co-located algorithms that trade in microseconds.
Some say this isn’t important: that the markets should be about the most efficient ways to profit from trading securities and derivatives, while others believe markets have lost sight of their underlying raison d’être. A couple of years ago, the CEO of a small data vendor lamented how disillusioned he had become with the markets and their endless pursuit of faster trading. Their original primary purpose, he explained, was not to enrich short-term speculators, but to give companies access to capital in order to grow, while allowing committed investors to benefit from those companies’ success.
Someone who shares this view is Jos Schmitt, CEO of a proposed new Canadian equities market, dubbed Aequitas, which aims to appeal to market makers and long-term investors by blocking “toxic flow” and “predatory trading strategies,” which have discouraged market makers from making markets in less liquid securities because the liquid stocks where they stand to gain most have become overrun by high-frequency traders, with whom they cannot compete on speed. When market makers are forced out by HFTs, “that means less liquidity, and eliminates that protection—and that’s bad for the investor and for the issuer,” Schmitt says.
Certainly, companies now tend to delay IPOs until later, so to enable growth companies to benefit from access to capital without the burden of a public listing, Aequitas will also offer a market for trading privately-held companies. “Small and mid-sized companies find it hard to find capital… and we need to provide a market specific to them, where they can access capital without a public listing,” Schmitt adds. “We forgot all about this as everyone pursued higher volumes to achieve higher revenues. We need to get back to the basics.”
And while latency isn’t going away anytime soon—hence Chicago-based xCelor’s new XPR switching device that can replicate data with latency of just two nanoseconds—there is certainly a need to perform more detailed fundamental research and analysis without worrying about its impact on one’s ability to trade based on speed. Bloomberg’s new range of fixed income, currency and commodity indexes aren’t aimed at HFTs; nor is the Nasdaq Global Index family that FactSet has just begun distributing, or the Stoxx and BlueStar indexes that Barclays and the International Securities Exchange, respectively, licensed to create exchange-traded notes and ETFs.
These assets typically don’t trade in an HFT environment—despite Quincy Data adding select exchange-traded funds to the data on its microwave network—and indeed, the types of investors who use and benefit most from indexes and ETFs typically aren’t HFTs, but retail and institutional investors, who might feel more secure and willing to invest more funds if the market where they trade these assets is not skewed by other participants who they perceive to have an unfair advantage.
Ironically for Aequitas, today, July 1, is Canada Day. And in the US, Thursday is Independence Day. Perhaps this will provide a rallying call for investors to free themselves from the yoke of latency-driven markets, and create a “slow-food for finance” movement. After all, the overall trends of key indexes arguably continue in spite of the effects of high-frequency trading, so would it really damage the markets to restrict some of that activity? Perhaps not, but with so much sunk investment in low-latency technologies, would the markets be able—or want—to wean themselves off their HFT fix?
Bryan Harkins joins to discuss how the CBOE-Bats integration is going and plans for the exchange operator going forward. Anthony and James talk about the SEC hack and Esma's potential new powers.Subscribe to Weekly Wrap emails