The problems of high-frequency trading are deeper than it seems
"The United States stock market, the most exemplary financial platform for world capitalism, is infected with fraud." This is what Michael Lewis (Michael Lewis) told Steve Kroft (Steve Kroft) on the evening television show CBS channel “60 Minutes”. Michael Lewis chose a witty, albeit slightly exaggerated, way of expressing the main theme of his new, meaningful book, The Fast Boys (Flash Boys). This is a provocative book about the outrageous methods of high-frequency trading.
Mr. Lewis’s well-thought-out story focuses on the perverse Wall Street system, which provided some professional investors with the opportunity to host their computer servers as close as possible to the stock exchanges for several hundred million dollars. This allows them to overtake the remaining players of the exchange for a few milliseconds.
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In some cases, “high-speed” investors may be able to collect crucial information bit by bit from trade data flows into their systems. Thanks to this data, they can look at what other investors are going to buy before they execute their orders.
But there is one problem in the story of Mr. Lewis: he attributes blame to the wrongdoers. He mainly blames hedge funds and high-frequency trading investment banks.
However, it seems that Mr. Lewis is silencing the real culprits: large stock exchanges that profit well on what gives super-fast access to certain investors.
While the large banks in Wall Street may have invented high-frequency trading, it became widespread because it was supported by such stock exchanges as: the New York Stock Exchange, Nasdaq and Bats - the electronic stock exchange system, which became a pioneer in this area. These exchanges do not just passively allow you to connect to your systems. They created systems and different price levels specifically for high frequency trading. For higher speeds, they charge a higher price, and provide more data to selected customers. In other words: the more you pay, the faster you trade.
This is the real problem: exchanges have a financial incentive to create unequal conditions.
This does not mean that “high-frequency” hedge funds and banks are not involved in this. They are also accomplices. And some may have gone further than simply following the rules. Eric Schneiderman, the Attorney General of New York, recently launched an investigation into high-frequency trading.
"There is a possibility that some things here may be illegal," he said in an interview with Bloomberg News. “There are some things that now may be legal, but should be considered illegal or the markets will have to be changed.”
If — and we hope that this is the case — the rules change, the new requirements are likely to be met by exchanges, rather than investors. New rules can force exchanges to block or modify the special data channels that they have created for high-frequency traders. Last but not least, the exchanges may have to find a way to create “speed bumps” in the system so that all investors can trade at the same time, regardless of the speed of the fiber optic cables that they have laid, to take advantage. It would be very similar to the system developed by the protagonist of Mr. Lewis’s book Brad Katsuyama (Brad Katsuyama) to slow down the speed of high-frequency trading. He created an alternative electronic exchange called IEX.
Michael lewis
Of course, while Mr. Lewis is arguing against high-frequency trading with a clear division into good and bad, with legal regulation things are much more complicated.
On “60 Minutes,” Mr. Lewis made it sound simple: “Insiders can act faster than you. They have the opportunity to see your order and play them against other orders in such a way that you do not understand it. They may conduct a forward transaction against your order. ”
The problem that regulators are going to solve by creating new rules is that the fight against high-frequency trading is not just a duel between David and Goliath. But this is not the confrontation of the small investor-novice with the E-Trade and the sophisticated high-frequency trader.
High-frequency traders earn most of their huge money by competing with other large organizations. Mr. Lewis argues that high-frequency traders, having unfair advantages, put at risk the pension funds of ordinary people. This may be true, but only partially: how do you think, where do high-frequency trading firms take money for investments? From pension funds. Thus, everything quickly becomes complicated.
Stock exchanges that serve high-frequency traders often justify this method of operation, stating that such trading adds liquidity to the market and lowers prices that all investors pay. In a sense, this argument is valid. The amount paid by investors has declined markedly over the past few decades. Defenders also add that there has always been some form of intermediaries on the market who "skim the cream off" each order. High-frequency traders just do it better.
Oddly enough, Goldman Sachs, one of the first high-frequency traders, came out in support of creating new rules to make the system more honest and stable. However, if a firm is serious about its position, it should consider abandoning some of its clients or putting pressure on them to change their working methods. Goldman is the underwriter of the upcoming first public offering (IPO) of Virtu Financial, which specializes in high-frequency trading.
Next comes the question of the responsibility of the Securities and Exchange Commission. Until recently, the agency not only overlooked such “high-speed” deals, but also actively encouraged them. In recent months, the commission has finally begun to consider the need to change the rules.
Mr. Lewis is drawing everyone’s attention to this issue, the solution of which, hopefully, will make the markets a bit more honest. (However, there are still a huge number of other problems that still allow fraud to flourish). But it is important that the new rules relate to the real culprits of cheating, and not just easy targets.
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Source: https://habr.com/ru/post/238113/
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