Bloomberg View published an op-ed today titled “High-Speed Trading Is Progress, Not Piracy” written by Professor Bernard Donefer of Baruch College. As expected, this is the typical HFT defense piece (why does Fred Mishkin come to mind every time we read an academic piece like this). We’ll save you the trouble of reading it and summarize Prof. Donefer’s main points:
– Criticism of HFT is overblown
– Information-timing asymmetries have always existed
– Automated market makers are liquidity providers
– There is some bad HFT (momentum ignition, layering) and this needs to be identified but don’t blame all HFT.
– Credit Suisse (the largest dark pool provider) published a study that shows volatility is down and spreads are tight.
Does every HFT defender simply reference the same old tired talking points? There must be an app somewhere that spits out these standard lines. While Professor Donefer stuck to script and hit all the talking points that the FIA/PTG would have liked him to hit, he has overlooked most of the structural issues that allow HFT to extract near risk free rents from the markets. He does not address:
-the fact that there are two separate quotes (the fast one that HFT calculates, and the slow one that the SIP provides)
-why are there 13 different stock exchanges
-the maker/taker model and the payment for order flow which has distorted asset pricing
-the conflicted order types like hide/slide and Day ISO
-the conflicted smart order routers
-the IOI’s that dark pools send to each other
-the poorly crafted regulations like Reg ATS and Reg NMS which helped create today’s fragmented market
Professor, these are the real issues. We all know that you can’t stop technology and we have no intention of trying to do so. But please, it’s time for some new defenses.
We must give the professor some credit though. At the end of his pro-HFT piece, he does make some very good recommendations for structural reforms (Interesting that even though he thinks there is nothing wrong with HFT, he feels the need to call for structural reforms). He states:
“We should consider creating new trading venues exclusive to institutional block investors, and perhaps allowing block traders to opt out of the SEC’s trade-through rule, which requires buying shares at the best available price, even when that’s a hindrance to large trades. A new call market limited to small and mid-cap stocks might increase liquidity and tighten spreads for stocks with low average daily volume.”
These are all excellent recommendations that would help bring back trust and confidence to the equity market. Addressing the needs of small and mid-cap companies separately is also the right approach since their needs are much different from the mega cap companies.
We are not in favor of new regulations for the sake of regulation. We are in favor of having the stock market serve its original purpose of helping companies raise capital so that they can grow and create jobs to help our economy grow.
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.
UPDATE: April 18, 2012
Last week we posted a comment titled ”The HFT Pirates and Their Academic Friends.” The piece was a rebuttal to a Bloomberg View article written by Professor Bernard Donefer. We spoke with Professor Donefer via email exchange after this post. He took exception to being likened to Fred Mishkin – i.e. academia for hire. The exact line we wrote was “As expected, this is the typical HFT defense piece (why does Fred Mishkin come to mind every time we read an academic piece like this). Professor Donefer made it clear that he was asked to write this editorial BY BLOOMBERG, and that he IS NOT in the employ of any HFT firm, and that he remains independent. He feels that associating him with Fred Mishkin is inappropriate. We agree that the comment likening his editorial to Mishkin was strong, and unprofessional. We regret making that reference.