Every year on June 20 or 21, the New York metro area and the surrounding environs (also known as the Northern Hemisphere) experience the longest day of the year, the summer solstice. This day has been celebrated for thousands of years by agrarian cultures and marketing departments who look for any reason to slap a sales sticker on a package.
Here at TABB Group we live up to a more noble cause: the resurrection of that former stronghold of U.S. investment dollars, U.S. equities. It has become painfully obvious that our industry can do itself no favors. We have a penchant for finding ever more creative ways to demonstrate our flaws to an increasingly bloodthirsty media and disillusioned public.
Despite the fact that the U.S. market has had relatively good performance compared with other equity markets, U.S. investors haven’t warmed up much more. I wonder if the folks who scheduled the June 20 Congressional hearing on Market Structure have a similar sensibility.
What a perfect day to shed light on industry practices.
The net flows within the U.S. domestic mutual fund industry are well-documented, so instead, I went to my friends at Lepere Analytics. As part of ongoing surveys related to their investment research product, they also collect information about the percentage of participants who own stock. According to the latest results, the percentage of U.S. investors who own stock has been stuck at about 66 for the last few years (see Exhibit 1). While that number may demonstrate that the U.S. equity markets are still far more diverse, in terms of discrete number of investors, than the over-the-counter derivatives market, it is still well off its highs.
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24 Comments to "Shut Down the Dark":
kennymcb
19 June 2012
what day would be appointed Richard Grasso day?
Comments (49)
kurtkujawa
19 June 2012
Adam, how about this; instead of shutting down the darks how about shutting down all HFT and use a CLOB. Darks are not the fault but rather the by product of the fragmentation. I vote to elimate the fragmentation by getting rid of all the "for profit exchanges", which would reduce the need for all the algo's, since there are no more algos, and no multiple venues, you wouldn't have flash quotes or the HFT latency arb stratagies, now you could get rid of all the stupid TCA products, eventually getting back to what the maket was intended to be, a place for buyers and sellers to swap postions.
Comments (177)
asussman
19 June 2012
@kennymcb: Ides of March
@kurtkujawa: I would love to see a CLOB for a day. Exchange CEOs draw straws to see who gets to run it.
Comments (159)
biancamano
19 June 2012
The first step for this industry to "right itself" is for the participants to STOP attacking each other and exploiting everything that's wrong with the equities markets and address the problems. That includes all participants, exchanges, Dark Pools, HFT etc... Who wants to buy into equities if the people who do it for a living are talking about how bad the market is and how investors are at a disadvantage? Would you eat at a restaurant where the waiters are complaining about the food constantly? And if they don't complain about their own food they are talking about how bad the food is at the restaurant down the street.
Attacking each other's business model will not get you business. Attacking the very industry you work in makes you look ignorant. It's getting old already....
Second thing for us to do is starting about the GOOD things about equity capital markets and what it has done for the US and the world. No one it seems is doing that these days.
As for shutting down Dark Pools I have to say that's an intriguing idea, I assume you also mean turning off iceberg and hidden orders too. May as well throw out opening and closing auctions too.
Turn off anything that allows undisplayed order types and what will you have? A completely dark market.....with no volume....
....actually there will be one type of order that will be in vogue, orders that are available for microseconds, so as not to be taken advantage of....I think they are called Flash orders?
Comments (33)
kurtkujawa
19 June 2012
Why don't we all just sit around the campfire and sing "Kumbaya". I've been in this business for 25 years and it's because of all the mollycoddling that got us into this mess. I had to watch the inept IPS (i'm a pu... syndrome) leaders of NASDAQ allow the destruction of that market by not standing up to the "soes" bandits and the congress that implemented what they wanted because NASDAQ just wanted to get along. I have no problem calling it as I see it. Exchanges for profit, fragmentation and the HFT's that prey off of it ARE the problem.
Comments (177)
biancamano
19 June 2012
I don't understand why Exchanges should not be allowed to be profitable, especially in a Capitalist market? I have heard a lot of people state that that is one of the problems, so perhaps you can explain why thats a bad thing and let us know what the solution should be.
Comments (33)
kurtkujawa
19 June 2012
That is correct, we do live in a capitalist society, but in this capitalist society we do have regulated utilities. Think of the exchange as a utility. An exchnge is just that, a place for buyers and sellers to meet and "exchange" positions. If there was a CLOB the market would have to be deeper. I keep refering to the old NYSE, now even with all its problems, the one thing you can not argue was the fact that it was the deepest and most liquid market ever. So instead of NASDAQ consolidating its book to counter act the soes bandits, it kept it fragmented and just shrunk the minimum size of display to 100 shares, the rest is history! Once all the parties that profited from the fragmentation (TCA, SOES, ALGO's etc... ) pulled there resources and lobbied a niave congress, it was the begining of the end.
Comments (177)
asussman
19 June 2012
@biancamano @kurtkujuwa I challenge both of you to find something you agree on in the next three comments. For example, would you both support a pilot program that would allow single stock issuers to opt-out of the trade-through rule?
Comments (159)
biancamano
19 June 2012
Absolutely would, especially if it's for size.
Comments (33)
kennymcb
19 June 2012
The issue is that the retail public are seeking to "invest" and the intermediaries are no longer "invested" with their clients in the process, they are seeking to exploit inefficiencies & vagiaries in the investment process, and taking comissions from it....everything has become shortterm and immediate - unfortunately reflecting the "now and entitlement" society...
Comments (49)
kurtkujawa
19 June 2012
of course I disagree with the trade-thru rule. A 100 share mkt should not hold up a block of stock at a price that a natural buyer and seller agreed upon. However, getting back to the problem, if there was only the the CLOB you probably wouldn't need a trade thru rule would you? Do you see where I'm comming from? not only are the markets fragmented, so now you have to try and make rules so that all the exchanges are on an equal playing field. Then why the hell even pretend you want competion, if all your going to do is keep creating rules to equalize them.
Comments (177)
csparrow
19 June 2012
one of the key problems imho with the "discussion" is the lack of precision in terminology. HFT spans many strategies some of which are good, others bad, yet we always use the term HFT. Dark likewise spans many different functionalities from natural block crossing systems to internalization - some dark is good some dark is bad (again, my opinion). I think we could make more progress if we were more precise. Even the term algo has evolved in meaning. Let's stop talking about fruits and get down to talking about Granny Smiths verus Mackintosh apples, and put the oranges aside. The devil is in the details and we are talking about generalities so we stay stuck on this treadmill and are getting nowhere fast.
Comments (37)
biancamano
19 June 2012
I also agree with Kurt that the CLOB is a viable alternative and possibly would address multiple issues in the Equities Market today. We only need to look to the Futures Markets to see it works. BUT, it only works due to exclusivity. The Equities Market structure as we know has no exclusivity at this point, neither the private or public markets would allow for such a monopoly, unless of course issuers demanded it. And as far as anyone can see, issuers are very naive when it comes to equity market structure.
Comments (33)
kurtkujawa
19 June 2012
csparrow, I agree with the terminology issue. So let me make myself clear. I have know problem with the institutionally focused natural block crossing systems such as liquidnet, bids, AX etc… I understand that not all HFT is predatory in its nature. I know there are hundreds of ALGO’s and aggregators, my overall point is that the only reason they are in existence is due to the fact that we have all this fragmentation. I remember telling many traders to beware and that the road to hell is paved with good intentions. When buy side traders jumped on the whole “wider spreads are bad and that its not fair to the “retail investor” and we can have better performance if we squeeze spreads, blah blah blah. Well let me tell you, if you add up all your costs between TCA, developing algo’s, the time it takes to fill an order, the time spent navigating the toxic waste land of exchanges, the time it takes to analyze all the crap before and after every order just to save a penny, the paralysis I have seen in traders to paranoid to act on buying or selling a block because they are so worried about how it will be graded by their TCA, they actually missed the opportunity, you have spent way more then the 1/16 spread, hell the 1/8 spread you were trying to avoid. Any trader worth his weight knows if it was a good trade or not, if the broker you used did a good job or tried to take advantage of your order. Bottom line is you can’t just keep adding more and more rules in order to try and fix the bad rules. You need to get rid of the old rules!
Comments (177)
sarnuk
19 June 2012
Some things can be done to make the markets more level. 1) 50 millisecond order life. A study has been done that shows that this willl not widen spreads. 2) regulate data feeds so that they do not include the treasure-trove of revision, cancellation, hidden order data etc. 3) correct the flaws the SEC already has found: difference in speed between SIP and direct feeds, flash orders, SOIs, IOIs, conditional orders, and whatever else they are called nowadays. insane order types like add liquidity only (ALO) and HidenotSlide, which do nothing but help HFT video game rebate arbitrage and distort price discovery - who can honestly say that having a buy order at 50 cents and a sell order at 50 cents NOT trade is a good idea? 4) regulator imposed excessive cancellation fees. 5) address the "bonafide market maker exemption" for short sale borrow requirements. Please... a millisecond flipper that rarely carries any meaningful inventory is hardly the "market maker" the regulators were thinking of initially when they created the exemption to ostensibly smoothen price swings.
The solution in my opinion is not to all stop talking badly about our market structure. The solution is to make it fair so investors regain confidence. Oh... Buy the book Broken Markets. Not ashamed to plug it. When you do... money goes to St John's Soup Kitchen in Newark.
Comments (166)
sarnuk
19 June 2012
By the way, I didn't mention eliminating for-profit exchanges, because while I think that has been a core issue in why we have devolved, I don't see how it can happen.
Comments (166)
pskopp
20 June 2012
> 1) 50 millisecond order life. A study has been done that shows that this willl not widen spreads
Sal, that is fantastic news. I will be quite rich!
I'm glad to hear that the market makers will not be pricing in the risk of being unable to cancel orders that I might find mis-priced.
Comments (28)
sarnuk
20 June 2012
pskopp,
Would you instead prefer the system we have today, where bait and switch is encouraged? What good is an order if you can not access it? The study we highlighted in our morning note http://blog.themistrading.com/lucy-charlie-brown-football-yank-nyu-study/ demonstrated how plain jane HFT "liquidity providers" behave when they get hit on a portion. The study is here: http://people.stern.nyu.edu/jhasbrou/SternMicroMtg2012/Accepted/WhatYouSee71.pdf
I think most of the industry is tired of playing that game we used to play with our younger siblings as children, where we would say "try and hit my hand" and then yank our hand away. Is that what a stock market should be?
Comments (166)
kurtkujawa
20 June 2012
Please, as csparrow said earlier about a lack of precision in terminology, pskopp, 1. can you please quite referring to HFT’s being market makers. 2. I would love to hear an explanation as to how posting and canceling quotes ads liquidity?
Comments (177)
asussman
20 June 2012
Look for my recalculation of the percentage of the market that is HFT based on CFTC TAC committee definition. Hint: it is going up.
Comments (159)
sarnuk
20 June 2012
Joe dissented in DC today. Can you imagine a panel that defines HFT to include long term money managers who use a a broker algo to effect a one way investment? In other words a Boston money manager that uses an algo to buy 100,000 EBAY can be considered HFT? They have succeeded in the definition in locking arms with long term investors, so that no regulation can be enacted. Proud.
Comments (166)
kurtkujawa
20 June 2012
Just like their predecessors, the SOES bandits, did when they claimed they were representing the retail or “individual” investor. Anybody with ½ a brain new that scam, which explains why the idiots in congress and the SEC didn’t!
Comments (177)
csparrow
20 June 2012
talking about HFT is like Global warming scientists talking about air instead of CO2 and methane. Why not stop trying to define the undefinable and start talking about specific behaviours like cancellation times, fleeting liquidity, latency arb and the like?
Comments (37)
biancamano
20 June 2012
...so just to bring this conversation back to it's original premise.....are we going to shut down Dark Pools?
Comments (33)