The buyside is concerned about high-frequency trading. The Investment Company Institute, the buyside’s advocate, is on the case. Ari Burstein, senior counsel in ICI’s securities regulation/capital markets group, recently presented ICI’s position at a recent HFT conference and spoke to Traders Magazine afterward.
On high-frequency trading—
We have nothing against high-frequency traders, per se. We are concerned about some of the practices associated with high-frequency traders or proliferated by high-frequency traders. Specifically, these are canceled orders and liquidity rebates, as well as the value of the liquidity they provide.
On HFTs sniffing out orders–
HFTs are not doing anything illegal. They are taking advantage of inefficiencies in the market structure. Institutions, for better or worse, try to hide their orders to prevent leakage of information. Everybody’s trying to sniff out everybody’s orders. We don’t have a problem with that. Our concern is transparency and the needs of regulators. We have issues where there is abuse or manipulative practices. Regulators are having difficulties detecting this because of a lack of transparency. That’s where we want to see some changes.
On the role of regulators—
We think more transparency is needed. There is some uncertainty about what high-frequency firms are doing. That means what strategies they are using and how they impact the markets. The regulators should have a lot more information.
On liquidity provided by high-frequency traders—
We need to understand in what names the high-frequency trader is active and what liquidity has been provided. How valuable is the liquidity? Is it true or fleeting? A 100-share lot for a millisecond? Head traders at mutual funds say that is not the liquidity they are seeking. That’s why they are not in the public markets, but in dark pools. We’ve had many discussions with HFTs. We ask them: How many names? How many are in the top 5 percent? They won’t say. How do you make money? Through liquidity rebates? They won’t say.
On canceled orders—
The biggest concern of senior buyside traders is canceled orders. In its presentation, [HFT firm] Tradeworx stated it cancels 65 percent of its orders. Others are at 95 percent. They can cancel as many orders as they want, but we don’t think that benefits individual investors trying to get large blocks done. We have advocated in our comment letters that there should be a fee or penalty above a certain ratio of executed orders to canceled orders. I’m not sure there are any benefits of a 98 percent cancellation rate for the buyside. It creates noise and confusion with price discovery. We don’t see the benefits for a large institutional investor trying to get a large order done. One hundred shares a millisecond is fleeting liquidity. It doesn’t necessarily help.
On a minimum duration for order—
SEC chairman Mary Schapiro mentioned fees or penalties, as well as the idea of minimum duration. You would see a lot of those orders disappear if they had to sit out there X amount of time. That would not be a bad thing, as we are not trying to get our orders done in one millisecond.
