TABB Group currently is interviewing the US hedge fund community for our annual equity trading study, and the question was posed to participants: “What issues should the regulators focus on this year?” Nearly all the respondents noted that regulators were not well versed enough on the nuances of trading to be able to make any informed decisions. One manager even complained that regulators have no people in-house with any real trading experience, so how could they know what rules to implement?
Now, it is not that the regulators have not been trying to understand market structure. The SEC has held a number of roundtables at which market participants were given the opportunity to explain definitions, defend market practices and point out requirements that they believe make the markets unfair. Everything from dark pools to high-frequency trading has been discussed. But hedge fund managers interviewed by TABB aren’t convinced roundtables are the answer.
Another hedge fund manager pointed out that everyone sitting at an SEC roundtable has their own agenda, making it difficult for the SEC to come away with the ability to make any real, unbiased decisions. Managers are also skeptical of political agendas and fear regulators may be influenced unfairly by larger market participants.
[Related: “Buy-Side Market Structure Experts: Where Are You?”]
The SEC's increasing focus on learning the details of algorithmic trading, for instance, will only help the Commission make better decisions on market structure policy. But listening to market participants read speeches on why certain order types and venues should or should not exist is one thing; actually understanding the details about the strategies being used is another. The SEC is attempting to not only understand what high-frequency trading is, but also the tools and technology being used by high-frequency traders and how they could be used to manipulate the market. This is a different and very important initiative.
The regulators have always been looked at as outsiders with zero market knowledge. There has always been a lack of respect for them in the industry because participants felt as though Grandpa SEC was not hip to the way today’s markets operate. That could all change if the SEC is able to move past Trading 101 to understanding the nitty-gritty of trading or, at least, if it works with and hires folks who do understand the markets. A more knowledgeable regulator may be a driving force to stop those who engage in unethical activity that they know regulators may not yet comprehend.
Let’s see who else joins the bandwagon -- the CIA, perhaps? Maybe not. But between the SEC and the FBI, let’s hope they are able to get up to speed quickly.
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6 Comments to "A High-Frequency Education":
phildonaldson
08 March 2013
Lack of experience and underfunding of regulators is probably some sort of constant in the universe. What is needed is a financial Frank Abegnale. They need to catch someone really good at high speed market manipulation and exploit his knowledge. So, having the FBI in on the issue can be potentially fruitful.
Then, they can make a movie about it later. :-)
Comments (2)
Anonymous
11 March 2013
3 points.
1. Unlike the firms they regulate, securities regulators have not integrated their IT operations with the business (which in this case would be surveillance operations). As trading became more electronic and IT began impacting (and in the case of algo and HFT began "dictating") bottom line returns, IT was invited to work alongside the traders on the trade desk. This same shift has not occurred within the various regulatory agencies, where IT remains marginalized in an outdated "service-provider" model.
2. Regulatory bodies could learn a great deal from modern day policing practices - specifically with respect to detection and apprehension vs. deterrence. All too often the focus is on catching and prosecuting invididuals rather than electronically monitoring overall compliance rates against specified benchmarks. Police can patrol outside of bars and catch the odd impaired driver (detection), or screen large number of drivers through road checks (deterrence). A mix of both is the preferred model.
3. The answer isn't more regulations but "better" application of existing regulations.
crammond1964
11 March 2013
exchanges have use this loop hole of being an RIE to allow certain market players to abuse and manipulate their markets knowing that regulators will only sptep in at last resort ....... LIBOR issue being a perfect case ; as LIFFE were warned many a time by current independent traders in 2007/8 .
Regulators are loathed to ask market traders their opinions on "market abuse " as they
would be shocked by their answers .. "i believe current abuse is probably the biggest player in our market !
Comments (257)
BobsUrUncle
11 March 2013
Most of the proposed legislation is so full of holes that it's nothing more than a whitewash. Certain anointed parties will still be able to do business as usual.
One of the main reasons we have a problem with HFT is the technology gap between the sell-side brokers and the speed traders. The brokers have thousands of servers that need to be upgraded at the cost of millions in order to keep up with the smaller, faster trading houses who can deploy the latest technology at very little cost. This is as it should be -- the fastest *should* win. That's what created the tech industry. Sure there are abuses like quote stuffing, but IMO, most of the propaganda we are hearing is created in order to save the brokers and their clients from having to spend $$$ on technology and replacing antiquated trade execution algos.
That said, here are some suggestions for actually helping retail investors (ha):
1) Time sync the exchange to GPS time. All members should sync to the same clock. The exchange matching engine should accumulate orders for periods of 10 seconds before doing the match. These periods will be know well in advance by all parties (e.g. 09:30:00 to 09:30:10, etc). This gives humans a chance to participate. I call this synchronous resting orders.
2) All exchanges should be synced to the same time. Reg-NMS can be easily satisfied and internalization can be eliminated because the retail trader will always know the best exchange quote (unless he's sleeping for more than 10seconds).
3) Limit number of trade orders per *firm* (not exchange MPID or port) within that period (e.g. 10,000 orders for prices above 100, 100K for $5-$100, 1M for less then $5etc . This has the added benefit of showing actual order size as brokers will not be able to slice and dice orders as minutely as before. Humans will be able to gauge the true interest in any instrument.
4) Force SAIC to meet min. latency requirements for the Reg feeds. They should be generated within close proximity of the exchanges. Quotes traveling to California and back is practically a stone age practice.
5) Eliminate dark pools. It only serves to hide market information from less connected players like retailers.
This will level the playing field between humans and machines, limit latency arb between the direct feeds and reg feeds, lower cost of handling market data, and allow member firms to amortize their IT investments over a longer time period.
Of-course none of this will happen...yawn...
Checkman
11 March 2013
All of the above are just more reasons why each matching platform needs to be equipped with an external device in charge of regulating a trading queue and enforcing a fairness algorithm which is transparent and auditable.
Ace
12 March 2013
The lack of accountability that the regulators have perpetuates the bureaucratic and apathetic aproach that we witness on the regulatory side. If the regulators had the same level of accountability that the buy and sell side have, things would be different. The Madoff affair and the lack of TOP-LEVEL accountability for not acting on the Markopolous Report is appalling - and indeed the head of the SEC seamed to not have her reputation impacted at all. the captain is responsible for the ship - it is time the regulators are held DIRECTLY accountable for their failures, in the same way that their regulated entities are. Good regulation maintains a fair and SUSTATINABLE market structure, but instead we have reactive regulation that is always looking to adress and explain the LAST crisis instead of being forward thinking to PREVENT the next one. And FINRA, from the member side, is generally viewed by Compliance Departments as a bureacratic annoyance whose focus is on generating fines and reviewing basic administrative policies and procedures. The general consensus on the sell side is that FINRA examiners (of which I was one) are not incentivitzed, trained, experienced, or interested in understanding the businesses that they are responsibole for regulators.