Can anyone be sure that Goldman Sachs, FBC, Morgan Stanley, Citigroup, etc. or any other dark-pool provider is NOT guilty of the same behavior? I mean, Goldman announced that they were closing their dark pool (in March right after the Michael Lewis book "Flash Boys" hit the market), and in fact today announced that they have been fined $800,000 for violations in their dark pool, saying that they weren't really sure what it added to the "bottom line" – or how much money they actually earned in that venue. ARE YOU KIDDING ME? Lawyers all over the country are licking their chops – some are going to have a field day with this.
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Contrary to what Michael Lewis or IEX's Brad Katsuyama would have you believe, there have been so many people (myself included) screaming about current market structure and this behavior for a long time. The problem is that the people who have been screaming are the "little guys" — the unconflicted, independent, boutique-like broker/dealers. But who in DC would listen? Not Mary Schapiro, the acting SEC commissioner at the time, not regulators, not elected officials, certainly not the HFT crowd. They would have you believe that we were an annoyance, a displaced set of brokers who were just creating noise.
My sense is that current SEC chair Mary Jo White has taken a much different approach, one that I hope will INCLUDE the little guys – the everyday practitioner, the independent "non-conflicted" broker who navigates the web of complexity that we call the U.S. marketplace.
Reality is that U.S. markets are way to complex – in fact more so than they need to be. Technology, which is supposed to create efficiencies, has allowed for more complexity. Why do we need some 70+ venues to buy/sell names like IBM, KO, JNJ, GE, C, JPM, etc.? It is NOT like you are getting a bargain at one vs. the other. Unlike Nordstrom's vs. Jos A Banks, where a suit will cost you $800 vs. $150 (and you get 3 more for free), stocks do not trade like that…. regulation forces best bid/best offer – and rightly so. So, why do we have 70+ venues to choose from?
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Competition is one thing, but massive fragmentation is insane. Sub-pennies, payment for order flow, maker/taker model, dark vs. transparent, conflicting order types designed by HFT firms to undermine the transparent market are all at the root of the problem — it is the greed of the investment banks to internalize and weaken the system that have brought us to this point in the conversation.
The U.S. capital markets are here to serve the public good. They are here to serve the investment community. They are here to help companies raise capital to create jobs and grow businesses. They are here to help investors create and generate wealth for a lifetime. They should NOT be demonized for what they are supposed to be, but should be recognized for what they have become and the role that regulators and industry professionals played in its development.
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Technology itself is not the problem — it is how we USE technology that is the problem. We have allowed technology to control us vs. us controlling the technology and this is the issue. What should be efficiency has turned into a game of chance, a roll of the dice. The Flash Crash, The Knight debacle, the Facebook fiasco, the BATS IPO implosion – these are only some of the issues that highlight the sensitivity, complexities and system operational risk. This latest revelation will only test investor resolve yet again. Complexity and risk have also contributed to the drop in trading volumes.
The HFTs make their money by "picking off" institutional order flow. They use technology to game the system, they trade 100 share lots for pennies and sub-pennies, stealing millions of dollars from legitimate investors (individuals, mutual funds, pension plans, foundations, hedge funds etc.). They rave about how they create liquidity and are good for the markets. REALLY? They create zero value, they cloud the system, they get in the way, they create unnecessary volatility and execution cost, they steal pennies all day long. But stealing pennies is a big business and Washington knows that. The question is: When will it stop?