OPINION: Summer Going, Lewis Gone, Whither HFT?

Terry Flanagan

It’s a reasonable expectation that the way ahead for U.S. equity market structure will become significantly clearer in somewhere between one and four months’ time.

Michael Lewis has presumably moved on from the topic, perhaps enjoying the summer on the royalties from his highly controversial Flash Boys book, or working on his next project. The populist furor around the book — entertaining and well-written but fast and loose with some facts — has calmed down as the 60 Minutes segment fades into the rear-view mirror, but Lewis  got his message across.

The summer lull is upon the markets, and quite possibly market regulators as well.

But it was only two months ago that SEC Chair Mary Jo White unveiled a series of proposals aimed at reining in abusive practices associated with high-speed electronic trading. The proposals were just that — proposals — but the Chair said to stay tuned for further developments “in coming months,” which has been widely interpreted as sometime this fall.

Market sources told Markets Media that some of the high-frequency trading tactics perceived as more unsavory declined materially in the wake of the publication of Flash Boys. So if a book can change market behavior, regulatory action can really change things.

And what will those changes be? Nobody can know for sure whether the SEC comes out swinging or backs up a bit, but our guess is on the former. A new rules framework would hold implications for multiple constituencies, including:

  1. High-frequency traders themselves, who may be looking at reduced profitability and a shakeout of marginal players.
  2. IEX Group — the white knight of Flash Boys hasn’t set the world on fire, as its recent market share has ranged from 0.7% to 0.9%. Does the market operator — innovative, but yet to prove successful — need a change in rules to thrive?
  3. Exchanges may face reduced volume if the SEC goes after HFT.
  4. ‘End-user’ investors including retail and institutional may face higher trading costs — or lower, depending on who you ask.
  5. Financial journalists such ourselves, who will have more to write about.

It should be an interesting autumn.

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