04.25.2014
By Terry Flanagan

Nasdaq: We’re Not Beholden to HFTs

Nasdaq OMX chief Bob Greifeld defended his exchange’s approach to high-frequency traders, citing statistics that show that firms with high order-to-trade ratios constitute only a miniscule portion of exchange revenues.

During the company’s first-quarter earnings call on Thursday, Greifeld said that Nasdaq closely monitors high-frequency trading through a measure called “H.O.T.T.” for High Order to Trade.

“We believe a key indicator of HFT is a high ratio of quotations in comparison to execution orders, and so, for purposes of this discussion, that’s what we are looking at,” he said. “Others may prefer different measures, but in the spirit of transparency, we are adopting an analysis that focuses on firms that show a high degree of quotations to execution orders.”

Greifeld used a chart which aggregates revenues from the products high-frequency firms tend to rely upon from Nasdaq’s Market Data, Access Services and Transactions areas. “This category of H.O.T.T. firms, when you aggregate their revenues from our various products, constitutes approximately 1% of our global revenue,” he said. “Of course, we wouldn’t want to imply that these revenues will be affected. But subjectively speaking, we believe in our model. We believe in our markets. And we believe that they will serve us well in the current debate.”

The debate has been going on since 2009, when HFT first entered the lexicon of financial markets, and has been rekindled by the publication of Michael Lewis’ Flash Boys, which purports to show that exchanges are extracting large revenues from HFTs in the form of co-location and pricing rebates, including maker-taker and inverted taker-maker.

The chart Greifeld used indicates the percentage of revenues derived from firms with H.O.T.T. of 60 to 100.

“You can debate where you should draw the line. So we’re going to show you several lines: 60 all the way up to 100,” he said. “This is our approach. Again, others may take a different approach. With this beginning, we looked at those market participant IDs, or “MPIDs”, who are not registered market makers with Nasdaq and who had order-to-trade ratios of at least 60 to 1.”

According to the chart, firms with H.O.T.T. of between 60 and 100 contributed 1% of Nasdaq revenues from Access Services, Transaction Services, and Market Data, which total between $226 million and $241 million. Access Services products include U.S. co-Location (cabinets, cross connects, microwave, and high-speed market data & order entry ports).

Nasdaq OMX excluded market makers in its analysis “for the very good reason that under the current regulatory regime, we believe they are putting capital at risk and contributing to price discovery, and thereby benefiting investors,” said Greifeld.

Greifeld’s remarks served to puncture the image that exchanges, in this case Nasdaq OMX, were abetting or at least tolerating the practice of HFTs front-running and manipulating markets.

“As an SRO that has been awarded three exchange licenses by the SEC in the U.S., we pride ourselves on providing open access in our markets,” he said. “This is our obligation under the law, and we have been upholding it since 1971. As a result, Nasdaq OMX has long, deep experience with facilitating transactions in the global markets.”

Transparency is a core value, he said. “We can’t predict what others will do, and much of the debate on this topic is conducted using terms about which there is no consistency.”

Feature image via Rawpixe/Dollar Photo Stock

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