HFT Debate Highlights Need for Transparency

Terry Flanagan

In the recharged debate about high-frequency trading touched off by mainstream news coverage of Michael Lewis’ Flash Boys, there is one aspect that both sides can agree upon: more information is needed regarding how electronic markets work and what are the roles of market participants, market operators and trade handlers.

“The book gave a very detailed account of how the industry looks to Michael Lewis,” said an executive at a U.S. market maker, who spoke on condition of anonymity. “It’s our feeling that the account was rather one-sided. He was very free to lionize one participant and vilify another. I just don’t think it’s that simple, but being that simple in this media-driven age sells books.”

“Without getting into who’s right or who’s wrong, our basic take is that it’s pretty clear that the market could use more transparency on how the whole process works,” this person continued. “That’s going to work for some points that Michael Lewis made, and it’s going to work against some points that Michael Lewis made. But the transparency will help the market overall.”

Specifically, areas that can use more transparency include brokers’ order-routing decisions; payment-for-order-flow arrangements; and market-data feeds.

“Some things are already transparent, but they’re not understood by the marketplace,” the market maker said. “Other things are not transparent at all.” In the latter category, the source said in some instances, a buy offer can be submitted to a broker but then it’s difficult to get any information as to where the order was sent.

Concluded the source, “more transparency would be a big help to everything.”

Some market participants and observers have taken sides of the debate, espousing less-nuanced views compared with the market-maker source.

“Lewis says that just because computers work faster than humans, no one is in a position to work out just what they are doing,” said Michael Aitken, chief executive of the Australian-based Capital Markets Cooperative Research Centre. “This is complete nonsense. Alongside trading systems we have been building surveillance systems which are capable, given the right information, of looking at orders in sub-microsecond intervals.”

In Aitken’s view, while there are issues associated with high-frequency trading, there has been no evidence offered since the book release supporting the notion that markets are “rigged,” and the primary risk is that regulators will overreact to the maelstrom.

“The evidence I have collected is that ill-conceived attempts to impede high-frequency trading will have a severe impact on liquidity, which will in turn raise the cost of trading for investors and the cost of capital for corporates,” Aitken said in a statement.

Featured image via Flickr/ Eirik Solheim

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