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HomeA Fresh New Perspective on Technology and Electronic Trading
Posted by Larry Doyle on July 30th, 2009 9:14 AM |
Is high frequency program trading inherently unfair? Does it improperly utilize technological advances? Does it allow front-running at point of execution? So many great questions, but to this point, the debate on this topic has completely focused on the equity markets.
Well, let’s shift the focus of this debate to the debt markets, commonly regarded as the bond or fixed income markets. What can we learn by comparison? Do the fixed income markets represent a fair comparison? As with any comparative analysis, do we have sufficient data to analyze and compare these markets? Non-financial people may be surprised, but the debt market across all sectors totally dwarfs the equity market in terms of size. Let’s frame the debate.
I view technological developments on the investment superhighway as having three lanes: analytics, risk management, and trade execution.
Whether in fixed income or equities, technology which can more efficiently and productively provide robust analytics is a great advantage and should be embraced. As a case in point, when I traded mortgage securities throughout the ’80s and ’90s, Bear Stearns invested in and utilized tremendous analytics. The Bear system was so advanced that it could literally analyze the mortgages in a mortgage-backed security to the level of the underlying zip code. No other dealer had those capabilities and it was a boon to Bear’s business. This technology was utilized to run a wide array of customer portfolio optimizations and helped Bear become the top mortgage shop on Wall Street. Bear’s downfall is a story for another time. The point being, technology which can more thoroughly review an investment product promotes competition and capitalism. There should be no speed limit on this technology lane of the investment superhighway. (more…)
Sense on Cents Interviews Joe Saluzzi Regarding High Frequency Program Trading
Posted by Larry Doyle on July 29th, 2009 7:07 AM |
High frequency program trading is the single hottest topic on Wall Street today. No individual has generated greater focus on this topic than Joe Saluzzi of Themis Trading.
I look forward to interviewing Mr. Saluzzi this Sunday evening, August 2nd from 8-9pm on NoQuarter Radio’s Sense on Cents with Larry Doyle.
This show will comprehensively cover the gamut of issues and topics involved in this highly controversial trading activity. Does high frequency program trading engage in front-running? Are retail and institutional investors disadvantaged? Are the exchanges and regulators looking the other way? What were the developments in the marketplace which brought us to this point?
NQR’s Sense on Cents with Larry Doyle will address these questions and more with the man ‘in the arena’ and at the center of the debate, Joe Saluzzi.
The show is available as a podcast on iTunes, and also archived in an audio player right here at Sense on Cents so it should serve as a tremendous informational resource as we continue to navigate the economic landscape.
Please share with friends and colleagues.
LD
Editor’s Note, 8.03.09: For a full review of this broadcast, please visit Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading.
Related Sense on Cents Commentary:
High Frequency Trading Debate: Mano a Mano (July 24, 2009)
Is Uncle Sam Manipulating the Equity Markets? (July 1, 2009)
Wall Street 2009: Too Smart for Our Own Good?
Posted by Larry Doyle on July 28th, 2009 8:03 AM |
Did the world’s candlemakers openly rail against Thomas Edison and his development of the light bulb? I have to imagine those candlemakers weren’t all that happy at the time. Edison embodied the American spirit. Capitalism thrives on the entrepreneurial spirit. That spirit promotes competition and has propelled our economy, our country, and our world over the years.
Capitalism also thrives on honest, open, and fair markets. Major financial and economic scandals over the years have often centered on self-dealing, abuse of insider information, and some semblance of unfair trade. These practices often capture enormous profits for a period of time but ultimately they kill trade. Why? Profits are a function of increased productivity, increased margins, and increased market share. To the extent that questionable, if not unethical or illegal, business practices initially promote greater profitability at the expense of future business flows, the foundation of that business has serious flaws.
Welcome to the world of finance 2009. In one way, shape or form, we have seen increasingly abusive business practices coarse through our markets and economy over the last few decades. From questionable asset securitizations to various forms of electronic trading, the practitioners have often reaped initial windfall profits while enacting real long term damage. How and why does this happen?
Highly intelligent people who are not properly regulated will drive profits to levels which are initially euphoric but if not properly monitored and managed are ultimately fatal. How so? When market participants feel that playing fields are not open, level, free, and fair, they will take their bat, ball, and capital and go play elsewhere. In so many words, the best and the brightest who implement trade strategies and computer programs are often simply ‘too smart for their own good.’ This scenario repeats itself regularly! (more…)
Wall Street Has a Problem as High Frequency Trading Moves to Washington
Posted by Larry Doyle on July 27th, 2009 11:25 AM |
When a hot financial topic hits Main Street and there are political points to be scored or lost in the process, little wonder it quickly moves on to Washington. I speak of the increasing attention and focus on high frequency program trading.
The serious ethical, if not legal, concerns surrounding high frequency trading hit Main Street this past Friday with a lead article in the New York Times. I highlighted that article along with my extensive writings on this topic here at Sense on Cents in my piece “Wall Street Has a Problem as High Frequency Trading Moves to Main Street.”
Well, we awaken this morning to see the high frequency trading issue making waves in Washington. The Wall Street Journal reports In a Flash, Schumer Warns SEC:
Sen. Charles Schumer (D., N.Y.) told the Securities and Exchange Commission that he will move to limit “flash” orders for stocks if the agency takes no action against them.
The practice routes stock trades through private liquidity pools before being sent onto other exchanges for filling. Critics contend that flash ordering creates a two-tiered system of investors, where those with access get a better price than those without.
“If the SEC fails to curb this practice, I plan to introduce legislation in the U.S. Senate to prohibit the use of flash orders in connection with optional pre-routing programs in order to ensure that trading in U.S. public capital markets is fair and transparent for all market participants,” Sen. Schumer wrote Friday.
While on one hand I commend Schumer for being proactive on this front, I am reminded that he has been one of the largest beneficiaries of campaign contributions and lobbying dollars from the banks and hedge funds engaged in high frequency program trading. Without questioning Schumer’s motivations, is he taking action to curry public favor against his being linked so closely with Wall Street?
Additionally, the fact that Schumer or any other political representative needs to address this issue again brings into question the efficacy of the regulatory bodies charged with protecting investor interests. How can any observer of high frequency program trading believe the investor playing field is anywhere close to being level?
Why has the field sloped? Very simply, as the various stock exchanges compete for business, the officials running the exchanges have traded investor protection and interests for the volume and revenues provided by high frequency program trading.
Who should have been engaged with these exchanges to prevent these abusive trading programs? The SEC and FINRA. Who actually exposed the issues surrounding high frequency program trading? Financial blogs and Joe Saluzzi of Themis Trading. I commend Mr. Saluzzi given his position in the marketplace.
I am excited to apprise our readers and listeners that I will have Mr. Saluzzi as my guest this Sunday evening August 2nd from 8-9pm on my internet radio show, NoQuarter Radio’s Sense on Cents with Larry Doyle.
Perhaps our elected representatives in Washington along with financial regulators at the SEC and FINRA may care to listen and learn.
LD
Related Commentary
Is Uncle Sam Manipulating the Markets?; July 1, 2009
Is Uncle Sam Manipulating the Markets? Part II; July 6, 2009
Is Uncle Sam Manipulating the Markets? Part III; July 8, 2009
Why High Frequency Program Trading Smells; July 14, 2009
High Frequency Trading: Point-Counterpoint; July 17, 2009
High Frequency Trading Debate: Mano a Mano; July 24, 2009
High Frequency Trading Debate: Mano a Mano
Posted by Larry Doyle on July 24th, 2009 5:42 PM |
In the spirit of continuing the dialogue on high frequency program trading, please view this ‘mano a mano’ debate on CNBC.
In one corner is Joe Saluzzi of Themis Trading. In the other is Irene Aldrige, Managing Partner of Able Alpha Trading.
Mr. Saluzzi initially exposed this activity to the public in late June. Irene views this trading activity as a natural evolution of modern technology.
Please let me know how you score “the fight.”
LD
High Frequency Trading: Point-Counterpoint
Posted by Larry Doyle on July 17th, 2009 6:12 PM |
High frequency trading activity has become a very hot topic both on and off Wall Street. My trading instincts tell me that this activity is not productive for the long term health and well being of the market. I have referenced the work of Joe Saluzzi and his colleagues at Themis Trading in making the case for the prosecution.
In an attempt to present a case for the defense, I searched and found commentary written by Sang Lee, managing partner at Aite Group. Lee recently wrote for Advanced Trading, In Defense of the High Frequency Trading Community:
Various potential regulations, including the reinstatement of the uptick rule and transaction tax directly threaten the business model of the high frequency trading community.
Sense on Cents counterpoint: The uptick rule required short sellers of stock to only transact at a price higher than the previous trade. Our friendly Investing Primer, Investopedia, informs us:
This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.
The rule worked fabulously for almost 70 years before being discontinued in July 2007. It was discontinued in an attempt to promote trading volume on the exchanges and in turn increased fees.
Sang Lee writes further in making his point:
In recent years, growth of alternative electronic trading venues has been driven by a multitude of factors: the introduction of decimalization; the adoption of FIX as the main protocol for electronic communication; the availability of technology for developing market infrastructure conducive for electronic trading; the rapid adoption of electronic trading; the adoption of algorithmic trading; and the availability of co-location services.
Sense on Cents counterpoint: Fairly obvious with all of the technological advancements that we are not looking at your grandfather’s “buying 100 shares of IBM.” Modern day trading activity is both fast paced and high energy. Little wonder why it has become so much more driven by technical analysis than fundamental valuations. (more…)
Wall Street Has a Problem as High Frequency Trading Moves to Main Street
Posted by Larry Doyle on July 24th, 2009 6:54 AM |
Until now, the debate over high frequency trading has largely been relegated to Wall Street periodicals, financial news outlets, and blogs, including Sense on Cents.
Well, this morning America awakens to see this high frequency debate course across the front page of The New York Times, Traders Profit With Computers Set at High Speed:
This article is likely sweeping the globe at this very minute and, in my opinion, is particularly devastating in its tone and delivery . . . and justifiably so.
I can only imagine the commentary this evening at the local Rotary Club, Knights of Columbus, Lions Club, town carnivals, and church fairs. Probably something along these lines:
“Have you heard how Wall Street is screwing us?”
“I knew that game was never on the up and up.”
“What a bunch of thieves.”
Without entering into a debate over the merits or lack thereof of this high frequency program trading, I think Wall Street has a huge problem on its hands. Why? A question of fundamental fairness. With the publication and dissemination of this article, try to explain to the average Joe looking to buy 50 shares of IBM how he is being treated equitably.
As the New York Times reports:
What do you think? Please share your thoughts and opinions.
LD
Related Commentary
Is Uncle Sam Manipulating the Markets? July 1, 2009
Is Uncle Sam Manipulating the Markets? Part II July 6, 2009
Is Uncle Sam Manipulating the Markets? Part III July 8, 2009
Why High Frequency Program Trading Smells July 14, 2009
High Frequency Trading: Point-Counterpoint July 17, 2009
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