Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.
Some of the largest high frequency traders were born out of the derivatives industry. The co-founders of GETCO were both involved in the options and futures business on the floor of the CBOE and CME before starting their HFT “market making” firm. It is not surprising that the Futures Industry Association created a splinter group called the FIA Principal Traders Group which is basically a lobbying arm for HFT firms. Check out their list of latency sensitive members . It’s also not surprising to us when we see a former executive from a futures exchange stand up to defend HFT. This time around Leo Melamed, former chairman of the CME, (let’s just call him Uncle Leo) is at it again and he is standing up for the rights of “cheetah” traders. Uncle Leo is no impartial observer and has a vested stake in the game. He is known to some as the “father of financial futures” and is an advisor to the CME (which of course benefits tremendously from HFT “arbitrageurs”). He is also a consultant to Infinium Capital Management. You may remember Infinium Capital for their recent “computer malfunctions” which caused their algorithms to start buying up crude oil futures. They were fined the whopping sum of $850,000 by the CME for “failing to supervise” their systems for these violations. In his FT article titled Protect HFT cheetahs from regulatory poachers , Uncle Leo talks about the usual evolutionary spirit of HFT, its ability to be that great spread shrinking machine and of course the creator of tons of liquidity. Uncle Leo also does some good old fashioned flag waving in his piece:
“Our nation’s futures markets are an outstanding example of “American Exceptionalism”. They are a crucible for innovation and job creation. They represent an American natural resource. It is the duty of the CFTC not only to keep up with the market cheetahs, but as Teddy Roosevelt admonished in a different context, they must also treat our natural resources “as assets which it must turn over to the next generation increased and not impaired in value”.
We have never heard the term “job creation” used from HFT defenders. Maybe they are trying a new route since their tired old defenses do not seem to be working. And then to invoke the words of Teddy Roosevelt and compare HFT to “natural resources” is a stretch even beyond what the most twisted, next generation SOES-bandit could ever imagine. While its true that the futures market is critical to the success of our financial markets, it’s also true that these markets have been hijacked by the hyper-speed, nanosecond speculator. And what exactly does an HFT trader do to get the title of “an American natural resource”? Uncle Leo tells us that “their principal objective is to take advantage of minute discrepancies in prices.” Well, that sure sounds like it benefits every American and we all should be thankful for these scalpers. It sure sounds like scalping minute price discrepancies is healthy for capital formation and job creation. But what happens when times get tough and volatility spikes, where will these “American natural resources” traders be then? We all know the answer to that question but somehow Uncle Leo forgot to tell us about that.