When Michael Lewis’ “Flash Boys” hit the bookshelves a couple weeks ago, it was as if a giant HFT target had been placed on the shooting range. Since then, the calls for HFT curbs, taxes, and other regulation have become increasingly shrill. While John Lothian News has been saying for years that the equity market structure is broken and in need of a fix, too much of the current narrative is based on misinformation and partial-truths, and its chief critics have consistently, if not willfully, misrepresented the facts.
A new round of shots was fired this weekend, this time at CME Group, by a trio of disgruntled traders who claim that the exchange is running an “unequal and two-tiered marketplace” and that high frequency traders are allowed to see orders before they are reflected in the market. The complaint is seeking class-action status.
Read the Bloomberg story => http://jlne.ws/1gv3ns0
Read the FT story => http://jlne.ws/QlmI4U
CME Group’s Anita Liskey reminded that the exchange runs only one data feed with prices that all investors receive at the same time, and that “no trader can see any other person’s order until it hits the order book, when it is made public.” Here is CME Group’s full statement:
“The suit is devoid of any facts supporting the allegations and, even worse, demonstrates a fundamental misunderstanding of how our markets operate. It is sad when plaintiffs’ lawyers bring a suit based on a desire for publicity, and in the rush to file a suit fail to undertake even the most basic effort to determine if there is any basis for their allegations. The case is without merit, and we intend to defend ourselves vigorously.”
The plaintiffs are clearly striking while the iron is hot, regardless of the circumstances.
The remarkable thing here is how quickly people are willing to paint this issue with the same broad brush as that used to paint the equity market structure highlighted in “Flash Boys.” That issue centers around the ability of faster traders to race orders among the many exchanges and dark pools listing fungible products. It is about the relative speed of direct feeds versus the Securities Information Processor (SIP). Regardless of one’s opinion on such tactics (which represent only a small portion of HFT but that is a conversation for another day), the securities and futures markets are two separate animals. The exact same equities trade on 13 exchanges and dozens of dark pools. CME Group has one data feed for its products, and its products are not fungible with any other.
Today’s markets are complex. Admittedly, the structure is in need of improvement. But let us not forget that today’s structure is an amalgamation of rules put in place, in part, to address some of yesterday’s problems and alleged abuses. Now, as then, the goal is to achieve “fairness” – a term that is as hard to define as high frequency trading itself.
The last thing we need now is a hair-trigger mentality, whether it be from overzealous regulators, attorneys, traders left in the dust by technology, or a general public whipped into a frenzy by a media firestorm. Step one is to separate ideas and allegations without merit from those that require further study and dialogue.
If we shoot first and ask questions later, the first question may be “My God, what have we done?” And if the weapon of choice is an atomic bomb, we will decimate a lot more good guys than bad guys.