The Cost-Benefit of Luminex

The end of HFT as we know it?

bourgaize-murray
When a dark pool isn't just a dark pool ...

Luminex, a newly-proposed trading venue operated by and for nine sizable investment managers, made major waves this week, even as it remains months away from completion. How serious might the consequences be, and for whom?

A little less than a year ago, the industry waited with bated breath as Michael Lewis's Flash Boys hit bookstores, quickly morphing from an indicative—surely never definitive—narrative about high-frequency trading (HFT) into a tired talking point.

By now, there isn't a whole lot of tread left on that rubber. What's happened since then, though, has been more interesting.

Yes, the US Securities and Exchange Commission (SEC) and its counterparts elsewhere have done a bit of hard thinking. Some mainstay exchange operators and major intermediaries, such as IntercontinentalExchange (ICE) and Credit Suisse, have struck up agreements that look something like a trade-at rule (sort of). And IEX Group messenger-in-chief Ronan Ryan illustrated why he's the best not-suitable-for-print quote in the business at Waters USA.

Lum' & Gloom
But most of all, developments in dark pools have raised some eyebrows. Enforcement authorities have sued or are investigating several sell-side-owned venues, including Barclays LX, for mismarketing their operating rules and other potential securities law violations.

This week marked another significant—though probably inevitable—turn in the post-Flash Boys saga, as well. A nonet of major money managers, three of them based near the world's most infamous stockpile of deflated footballs in Boston, announced their intention to build an exclusive dark venue for US equities dubbed Luminex—potentially sucking a ton of block liquidity, especially from majority-owner Fidelity, out of current trading venues once it comes online later this year.

A few thoughts come to mind. First and rather simply, it's striking to compare the list of Luminex participants to some other recent news: the group of new SEC market structure committee members announced last week.

Unsurprisingly, there is little overlap: only T. Rowe Price and Invesco are involved with both. Given that number, we probably shouldn't wonder how it is that a massive disconnect remains in the conversation and activity around HFT in 2015.

Secondly, though this is far from the first dark pool developed from scratch and as a collaborative enterprise, Luminex's political significance and potentially massive flow should make for a very interesting technological and operational undertaking, details of which I fully intend and hope to bring to BST's readers' attention in the coming months.

Blunt Message
Finally, as was pointed out over at ZeroHedge after the announcement, this is also bad news for price discovery in stocks overall—to say nothing of IEX, which could now see its impetus for existence rather impaired.

It is also an affront to the value proposition (if not the basic logic) of the argument that HFT's backers have made time immemorial, that the benefits of greater liquidity and price optimization far outweigh the costs of that liquidity arriving to the market with a distinct technical advantage.

While we're way too far out to know how this turns out, the message coming through from the Luminex group is pretty blunt: we'd rather put the money and energy in on our own terms, and see where it gets us, than wait and watch where the reform process goes.

It's a strong statement about regulatory and venue-level capture, moreso even than Flash Boys, and one which we should all worry about. 

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