1) I noted yesterday that with all the hoopla over cloud computing stocks, the initial public offering of stock exchange BATS Global Markets was not eliciting much excitement. BATS did indeed price 6.3 million shares, but at $16, the low end of the $16 to $18 range.
The problem: Trading volumes — which BATS and all exchanges rely on for income — are miserable and showing no signs of getting better.
So far in March, the average daily volume at the New York Stock Exchange (all trading in all NYSE-listed stocks) is about 3.9 billion shares, down 2 percent from February, and 12 percent below March of last year. It's the lowest since July 2011.
The Wall Street Journal ran a story today noting that the Securities and Exchange Commission was investigating some aspects of high-frequency trading (HFT),based on comments made by the S-1 filing of BATS.
These are old stories: Those who despise HFT have screamed that the policy of allowing "collocation," whereby servers are placed in the same data center as the exchanges, which — it is claimed — allow HFT to get information a microsecond before those who don't have access to the servers.
This is true, but the access is available to anyone willing to pay for it: Access is not limited to HFT. Hedge funds , pension funds, mutual funds, anyone can get access to the servers. There is no shortage of space.
Can some people collocate in a superior, faster way? I don't know. That may be worth investigating.
A separate issue being investigated is worth more time: payment for order flow. Because there is competition among exchanges (NYSE, NASDAQ, BATS, and Direct Edge, as well as dark pools and firms that "internalize" order flow like Knight Trading and Citadel), exchanges offer rebates to firms that send order flow to their exchanges, typically providing a rebate for those that "give" flow and charging for those that "take."
The difference between the prices charged to "take" and "give" fee is profit for the exchanges.
The problem: Orders should go to places with best prices and fastest execution, a practice known as "best execution," not who will pay you the most to trade on their exchanges. Reg NMS is supposed to require best execution.
The solution: Why not charge everyone a flat fee for giving and taking order flow?
Or here's a better idea: Why not go back to trading in 16ths, rather than a penny?
This is the heart of the problem with our market structure. When the market went to decimals (trading in pennies) more than a decade ago, the reward for being a market maker changed, from trading in 16ths of a dollar, to one cent. There was still lots of risk, but less reward. That's what led to the computerization of market making: It was simply less profitable to be a market maker.
If you go back to trading in 16ths, or nickels, you can get rid of payment for order flow. But I do not expect that to happen. The genie is out of the bottle.
3) Fascinating piece from ConvergEx Group today on Venezuela, noting that Chavez is seriously ill and that there is a chance of a change of leadership soon. Currently 43 percent of all Venezuelan crude exports go to the U.S., but production is small compared to capacity. Venezuela has the second-biggest proven oil reserves in the world, after Saudi Arabia. Chavez has cut production by 33 percent since taking power in 1998. His presidential challenger in October, Miranada Governor Henrique Capriles Radonski, wants to expand production and may be more accommodative to the U.S. The main point: Chavez is seriously ill, even if he wins the election change is coming.
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