Sense on Cents

Joe Saluzzi

For those unable to listen to my interview regarding high frequency trading with Joe Saluzzi of Themis Trading, I hope this timeline review of the questions asked and topics covered proves helpful.

I strongly encourage anybody interested in the nature of our markets today to listen to this interview in its totality. Joe provides a wealth of riveting information. In the spirit of balanced journalism, I believe I took a fair approach in my discussion with Joe; I have already reached out to people within the HFT community to invite them on the show. I hope they take me up on my offer.

As we move forward on our economic landscape, I hope this interview will serve as a significant informational resource.

To access Joe’s insights on specific topics, simply point and click on the audio player bar (provided at the end of this post) to the particular minute and second referenced. I apologize for the technical difficulties during the first 8 minutes, 56 seconds of the show. The timeline below picks up the broadcast at the start of the show which begins at the 8 minute, 57 second mark:

8 minutes, 57 seconds – Welcome and introduction.

11 min, 45 sec – What is Regulation NMS and what impact has it had on the marketplace?

13 min, 30 sec – How has the pricing of stocks in decimals impacted trading?

14 min – What is ‘displayed liquidity?’

14:30 – Historical transition from obligatory market making of specialists to high frequency trading.

16:30 – Definition of HFT terms, including: algorithmic trading, predatory algorithms, dark pools, ECNs, flash orders.

21:30 – How do equity exchanges work? Nature of two-tiered markets and the inherent conflict of interests exchanges have as for profit entities. Overall level of confidence in exchanges.

24:45 – Call for an independent commission to investigate exchange operations.

25:55 – What is co-location and how does it impact equity trading?

27:15 – What is naked access and how does it impact equity trading?

29:30 – LD plays devil’s advocate and challenges Mr. Saluzzi about benefit of narrower spreads versus the costs to investors. Joe delineates volume and churning versus true liquidity.

32:30 – Further color on exchange volume which is heavily dominated by high frequency trading. Market analysts estimate that upwards of 70% of equity trading is driven by high frequency traders who represent 2% of market participants!!

34:00 – What risks are taken by high frequency traders? How are these risks mitigated?

36:20 – Could HFT manipulate the market? Does HFT present systemic risk? Were oil markets manipulated?

39:50 – Is HFT a violation of the Sherman Anti-Trust Act?

41:00 – Mr. Saluzzi highlights that as of September 1st, the London Stock Exchange will no longer issue rebates for liquidity providers. Joe recommends the same for our exchanges.

41:50 – Discussion of regulatory oversight of exchange activities.

44:15 – How should retail investors adapt to trading and investing in the presence of HFT? Should they utilize limit orders? Market orders?

47:20 – Do vendors sell HFT software or do individuals develop their own software code?

48:20 – How do we compel regulators to embrace technological advancements while maintaining a fair and balanced playing field?

50:20 – Comparing electronic trading in the bond market to the equity market.

51:25 – Impact of putting a speed limit on the equity highway. That is, what would happen if all orders were good for a 1- second time requirement while exchanges eliminated flash orders and rebates.

53:25 – What is the risk or potential that HFT could crash the market? What is pushing the market higher currently?

55:00 – Overview on market, and desire for integrity in the marketplace.

Instructions: Once you’ve clicked on the “Play” button to begin the playback, point and click on the audio player bar to the particular minute and second referenced for each topic (or listen to the entire show…it’s worth it!!). Remember, the show does not begin until the 8 minute, 57 second mark.

Once again, I thank Mr. Saluzzi for elevating the debate and dialogue on this topic and our markets in general.

I hope anybody reading this commentary and listening to my interview with Mr. Saluzzi finds it truly beneficial. If so, please share it with friends and colleagues.

Additionally, please follow all of my work via Twitter, Facebook, an RSS feed, or preferably by e-mail delivery. All links are provided at the top of the page or in the right sidebar.

Comments, questions, constructive criticism always appreciated.

LD

Related Sense on Cents Commentary:

Is Uncle Sam Manipulating the Equity Markets?
– Mr. Saluzzi addresses questionable nature of high frequency trading on Bloomberg. (July 1, 2009)

Is Uncle Sam Manipulating the Equity Markets? Part II
– Sergey Aleynikov is arrested for stealing high frequency software from Goldman Sachs. (July 6, 2009)

Is Uncle Sam Manipulating the Equity Markets? Part III
– Joe Saluzzi addresses possibility of market manipulation via high frequency trading. (July 8, 2009)

Wall Street Has a Problem as High Frequency Trading Moves to Main Street
– The New York Times writes a lead article on high frequency trading. (July 24, 2009)

High Frequency Trading Debate: Mano a Mano
– Joe Saluzzi and Irene Aldrich of Able Alpha Trading engage in a debate on CNBC. (July 24, 2009)

Wall Street Has a Problem as High Frequency Trading Moves to Washington
– Senator Chuck Schumer (D-NY) announces he will move to limit flash orders if the SEC does not take action. (July 27, 2009)