MarketsMuse Editor Note: Having close on 3 decades “habitating” within the financial industry’s sell-side, this greybeard former trader turned opinionator and postulator is certainly fascinated by the spirited debate over “high-frequency trading”, not only because most of those arguing for and/or against HFT can only selectively point to lop-sided studies to defend their respective arguments , but the escalating war of words (over the Battle of the Transformers) has more recently captured the attention of the always beloved experts of financial industry market structure and trading technology: the Federal Bureau of Investigation. If there were an agency less qualified than the FBI to ask the right questions and determine whether any laws have been broken, it might be the always-conflicted and lobbyist-influenced SEC; particularly when real industry experts have vehemently pointed to an industry practice that truly undermines the credibility of financial markets: retail brokerages and custodians selling their customers orders to “preferenced market-makers” in exchange for cash.. [Then again, given that FBI Director Jim Comey came to his new job after serving as General Counsel for the world’s biggest and most high tech hedge fund, the debate about who is most conflicted becomes more complex]…..Ironically, the biggest beneficiary of the practice of payment for order flow is Charles Schwab (only because they’re arguably the biggest of the major custodians, but all others who do the same benefit accordingly)..whose Chairman/CEO announced this week that “HFT is a cancer that is plaguing the industry..” Clearly someone who likes to have their cake and eat it too.
In trading market lingo, “Bid Repeats”; the largest of the industry’s retail brokerage platforms–ostensibly those who have a fiduciary obligation to secure best execution on behalf of its clients when routing orders to the marketplace, are selling those orders to favored proprietary traders, a group whose primary obligation is to their own P&L, NOT the interests of public investors who would like to presume they are receiving best execution on their orders. Adding insult to injury, customers of these brokerages who know better and request their orders be routed to agency-only execution firms (whose role is limited to fiduciary broker and to secure true best execution by canvassing all market participants for best bids and offers) are rebuffed and faced with egregious fees on any orders in which customers ask the custodian to “step-out” or “trade-away” to specific agency-only firms.
While most objective financial industry experts (if not experts from any other industry) would liken the practice of payment for order flow as a kickback scheme that undermines the notion of ‘fairness’, this practice, which clearly is antithetical to the notion of “fiduciary obligation” has gone virtually unmentioned by the media, and those from within the industry who have tried to raise this flag have been futily dismissed by advertiser-influenced media platforms, if not regulators responsible for overseeing fair and orderly market practices.
All of that said, and for an assortment of reasons that has led to market fragmentation, the existing landscape enables a quagmire of complexity when trying to distill what makes sense, especially when those who have the biggest role in market efficiency are those who are focused on making dollars for themselves, not sense.
Perhaps one of the week’s best observations can be found not by replaying clips from heated debates broadcast on CNBC, but in an op-ed in today’s New York Times courtesy of Philip Delves Broughton, who, in critiquing the impact of Michael Lewis’s new book “Flash Boys”, frames the issue of HFT in a very intelligent way. His opinion piece, “Flash Boys for the People” can be found by clicking on this link.
Markets Muse 