At the very core of this argument is the current market structure, which has allowed for 13 exchanges, which are regulated, and some 80+ alternative venues, which operate like exchanges but are not regulated. Order types were created to satisfy the need of the high-speed trader, at the expense of investors. Their original function as a "public market," where buyers and sellers come together, has been destroyed and is in fact the root of the problem.
Payment for order flow — a la Bernie Madoff — further complicates market structure. Investment banks that either own their own venues or are investors in alternative venues are rife with massive conflict-of-interest issues adding to the fractured, fragmented structure that then breeds the need for sophisticated automation to deal with the myriad of structural issues. High-frequency trading is the cancer created by a market structure that is so complicated that it is almost impossible to regulate.
As a floor trader on the NYSE, here are my key issues with high-frequency trading:
High-frequency traders are NOT investors. They don't think like investors and they don't add any liquidity to the process for the institutional investor.
They're getting an unfair advantage. Look at the Virtue filing – they are a high-frequency trading firm that lost money on only one day out of 1239 days. Really? How do you think they do that? Information about order flow that allows them to trade ahead.
Exchanges, now publicly-traded companies, have allowed for "special order types" that cater to the cast of characters at the expense of the real customers – the real asset managers. Order types that "read" incoming order flow then react by "stepping ahead" of that same institutional order allowing them to profit on information that is not yet publicly available. High-frequency trading has driven the real asset manager out of the market — forcing them "underground," so that their order flow is not seen or read.
This is a disaster for the U.S. capital markets. It only weakens and threatens the very existence of a strong, vibrant, robust capital market. It causes mispricing in stocks and clear frustration among asset managers.
You have to ask: Why do we need 90+ venues to trade stocks? Unlike retail, where there is plenty of competition in price, that is not the case in equities at all. Why are investment banks allowed to internalize? Why are there so many dark pools? How is this helpful at all to the public marketplace? Doesn't anyone else see the glaringly clear conflict of interest this creates?
I applaud the New York Attorney General Eric Schneiderman, author Michael Lewis, the FBI and the many market participants who have been screaming about this for years for forcing the conversation. In the end, it will surely help to drive future market structure conversations to help restore confidence and integrity to the greatest market in the world.
Kenny Polcari is director of NYSE floor operations at O'Neil Securities and a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.
Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.