The United States Senate took on high frequency trading and lost, I guess. Well, it didn’t win.
On Tuesday, the Senate Banking Committee held a hearing on the controversial trading practice. The hearing featured a number of boldfaced Wall Street names, including hedge fund titan and sometime-high-frequency-trader Ken Griffin; Jeff Sprecher, the head of the company that owns the New York Stock Exchange; and Joe Ratterman, the CEO of BATS, the stock exchange that is one of the chief “bad guys” featured in Michael Lewis’ recent book on HFT.
All of them said that high frequency trading is good for the market and should not be banned. The hearing contained no information to refute those facts.
Even Senator Elizabeth Warren took a shot and missed. Warren asked Griffin, just for context, how profitable his high frequency trading fund was. Griffin said he didn’t have a high frequency trading fund, which is technically true. He’s got a tactical fund that used to be all about high frequency trading but now is bigger and does a bunch of things, only one of which is high frequency trading. So it’s not solely a high frequency fund. Question deflected.
Griffin said we need high frequency trading to keep prices of exchange traded funds fair and accurate. But there have been lots of instances in which ETFs have been mis-priced. And shouldn’t making sure ETFs work be the job of BlackRock or others who rake in billions of dollars a year on such products?
There were even some swipes at Michael Lewis and his recent book Flash Boys, which vilified HFT. Griffin said the author had never spoken to him. Sprecher in a backhanded compliment said he admired IEX, the trading venue whose head Brad Katsuyama comes across as the hero of Lewis’ book. “I very much appreciate the IEX exchange, they have four order types,” Sprecher said. “I would love to get to four order types. They also have less than 1% market share.” The market, Sprecher was saying, has spoken, and they don’t want IEX.
All of the participants called for more disclosure of the fees that brokerage firms collect when they decide where to send their clients orders. They all agreed that there are too many places where stocks can trade, creating a potential for investors to get ripped off or for another so-called flash crash.
In fact, there seems to be a growing consensus from law makers and regulators, who are likely being guided by people like Sprecher and Griffin, that the real problem with the market is complexity; not lightning-quick trading that may or may not be picking investors’ pockets. Both Griffin and Sprecher said dark pools should be subject to the same regulations that exchanges are subject to. Sprecher says he would like to eliminate the fees that traders and brokers are paid to trade at one exchange over another.
All of those changes sound reasonable. But people who are likely to benefit the most from those changes are people like Sprecher and Griffin. The NYSE and trading venues like Griffin’s have to pay those fees. And, of course, Sprecher would like to go back to the days in which the market was simpler. Back then, the NYSE handled 90% of the trading volume.
Dark pools were formed, with different rules, in part because institutional investors thought they were not getting a good deal on exchanges. And there are “fair” dark pools, like IEX. But as Sprecher pointed out, no one trades there.