The U.S. Senate Permanent Subcommittee on Investigations is holding hearings tomorrow on high-frequency trading (HFT), specifically in the Homeland Security and Government Affairs Subcommittee.
Not a surprise, given the recent interest in HFT, but the lineup is a bit strange.
The first panel consists of Brad Katsuyama of IEX and Robert Battalio, a professor from Notre Dame.
Then a couple heads of the exchanges...new NYSE head Tom Farley, and BATS CEO Joe Ratterman. There's also Joseph Brennan, the Head of Global Equity Index Group at Vanguard, and Steven Quirk, a VP at TD Ameritrade (AMTD).
This, for a hearing on high-frequency trading. Except there are not high-frequency traders on the witness list, no dark pools, and nobody from the SEC. And NASDAQ is not on the list!
Kind of strange, no? Kind of light on the stakeholders in the business, right?
Brad Katsuyama will likely speak about what IEX's business model is doing to protect the long-term investor from perceptions that the exchanges favor HFT.
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My guess is that Ratterman will be grilled because the Committee wants to ask if exchanges are kotowing too much to HFT. He will also likely defend the current rebate structure.
The wildcard is Tom Farley, the new President of the NYSE. This is a big platform for his debut. Arguably, Duncan Niederauer, who will be departing as CEO of the NYSE, should be the one doing the testimony, but whatever.
Fortunately for Farley, his boss, Jeff Sprecher, head of IntercontinentalExchange (ICE), which owns the NYSE, has recently said ICE is willing to explore changes in market structure. Sprecher has made it clear that he is looking for a simplified trading structure: Fewer exchanges, fewer order types. He's also signalled he is willing to consider changes in the rebates exchanges offer to traders, much of which drives firms (particularly HFT firms) to trade at exchanges.
Sprecher has implied he would consider changing that, though it's not clear if he wants to eliminate rebates or just reduce the amount paid.
Either way, this kind of talk is likely to be greeted with somewhat more sympathy by the Commitee. In fact, the NYSE could come out smelling relatively sweet here.
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As for the rest of the panel, Battalio has recently written a paper somewhat critical of brokerage firms taking payments for their order flow, implying that some may be routing to venues for economic benefits that are not consistent with best execution requirements.
He is likely to call for more disclosure from the brokerage firms, but it's unlikely he is going to engage in wholesale bashing of HFTs.
That's probably why Quirk from Ameritrade is there--to answer that question. TD Ameritrade last week released details that it had received $236 million as payment for order flow in 2013. That's only 8.5 percent of net revenue, but it's been growing.
It will be very interesting to hear what Joseph Brennan from Vanguard has to say. Bill McNabb, the CEO of Vanguard, has previously made comments that HFT firms have helped investors cut trading costs.
So where does this leave us? A rather uneven open for a hearing, if you are investing HFT and the broader subject of market structure.
There will certainly be more hearings...my understanding is another hearing has been set for July 8th, though the Committee declined to confirm that to me.
And...in case you don't think enough is being done on HFT...Senator Mark Warner, chairman of the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investments, will chair ANOTHER Senate hearing on HFT and its impact on the economy and U.S. securities markets.
That's on Wednesday. The day after the Senate Permanent Subcommittee holds hearings. On the same subject.
What, ultimately, is going to happen? The Committee will undoubtedly try to stir up some moral outrage, but what will be the long-term effect?
My sense is that we are heading toward a system where HFTs will be much more regulated; this was implied by SEC Chair Mary Jo White's recent speech at the Sandler O'Neill Brokerage and Exchange Conference.
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HFTs are going to have to register with the SEC, and they will likely be required to report profits, just like broker/dealers.
As for dark pools, there will be much more disclosure...about volumes by broker and other information. There will be more info on where the orders are coming from. That's a good thing.
What about real changes in market structure? It's unlikely there will be wholesale changes in Reg NMS, the main regulation that created the current market structure. Wholesale elimination of rebates? Unlikely. A pilot program, yes. Elimination, no.