High-Frequency Trading

Vanguard chief defends high-frequency trading firms

Stephen Foley

The chief executive of Vanguard, which became the world's largest mutual fund company by championing low costs for the small investor, has ridden to the defence of high-frequency trading firms and dismissed suggestions that the stock market is "rigged."

Bill McNabb's contribution to the increasingly shrill debate follows the publication last month of Michael Lewis's book Flash Boys, which claims that HFT companies manipulate the stock market. It also comes as government authorities step up their investigations into potential abuses of equity markets.

In an interview with the Financial Times, Mr McNabb said that HFT firms had helped investors cut their trading costs, and urged the U.S. Securities and Exchange Commission not to reverse the market reforms that gave birth to the phenomenon.

Bill McNabb, chairman, president and CEO of Vanguard Group
Tim Boyle | Bloomberg | Getty Images

HFT firms knit together the dozens of trading venues that compete for investors' business, he said. "Our perspective is be careful in pulling the thread because the whole suit may fall apart."

Vanguard manages $2.5 trillion of client assets, mainly in mutual funds, and has quadrupled in size over the past decade by preaching the gospel of low fees.

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The firm has had to spend heavily on technology to deal with the proliferating number of stock exchanges and trading venues, but says the reduction in spreads—the difference between the price of buying and selling stocks—far outweighs those costs.

"Are different traders trying to gain every advantage they can? I think that's true," Mr McNabb said. "I think that's always been true but I don't think the market is rigged.

"From a data perspective, we can see what's happened to our fund shareholders over the last 20 years, and they've benefited by that reduction in transaction costs."

Mr McNabb also dismissed claims that HFT firms sniff out when a large buyer or seller is trying to trade so they can push the market against them.

He said Vanguard had examined these so-called "market impact" costs, by looking at tracking error in its exchange-traded index funds. "We actually have a really good perspective on this, and there's no question in our mind that the cost to investors through funds has come down," he said.

Jack Bogle: HFT here to stay
Jack Bogle: HFT here to stay

Vanguard has expressed its view of the benefits of the current market structure several times as concern about HFT has risen in Washington.

The company does support limited changes to market practices so that exchanges do not pay HFT firms for orders and offer different trading fees to those which add or use up liquidity, Mr McNabb said, but it does not favour the root and branch reform of market structure that some have called for .

In Europe, the new Markets in Financial Instruments Directive imposes additional regulation on HFT, and in the US, the Securities and Exchange Commission, which oversees Wall Street, has said it is looking at certain HFT practices as part of its review of equity markets.

The Commodity Futures Trading Commission, Department of Justice and FBI all recently confirmed investigations into high-frequency trading, along with New York attorney-general Eric Schneiderman.

—By Stephen Foley of The Financial Times