It would come as no surprise that high-frequency traders (HFTs) are feeling a bit under siege since the publication of Michael Lewis’s Flash Boys at the beginning of April, however, if the industry is waiting for the other shoe to drop, this week it was raining patent leather.
The HFT industry was seemingly hit on all sides over the past several days, with class action lawsuits being filed in the U.S., new regulations approved by the Europe Union, and one high-speed trading firm indefinitely postponing its scheduled IPO amid what could be charitably described as a soured environment for high-speed trading.
“That book has caused quite a media buzz, and of course, while not all high-speed computer trading is nefarious, the temperature certainly has been turned up,” said Prof. James J. Angel, a visiting professor of finance at The Wharton School of Business at The University of Pennsylvania.
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Worse yet for the industry, investigations were gaining steam at the U.S. Department of Justice and the New York Attorney General’s office, which issued subpoenas to six HFT firms last week. In addition, both the Securities and Exchange Commission and the Commodity Futures Trading Commission have opened up inquiries into several facets of high-speed trading, including revisiting rules many see as advantageous to HFT firms. Such subjects at the maker-taker rule, tick sizes, and the trade-at rule are all coming under re-review, pushed by intense lobbying by the large exchanges and some big banks. Naturally, the potential losers in all this scrutiny could be the HFT firms.
Some critics of the industry applaud that the HFT industry is finally on the hot seat. “I think there should be serious inquiries,” said former U.S. House Financial Services Chairman Barney Frank said in a statement, urging Congress to hold hearings into high-frequency trading and asking whether new trading technology is developing too fast for federal regulators to police it. “My hope is that they get on top of this now,” Barney said.
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Even the possible specter of a financial transactional tax is gaining attention. Several Democrats seized on the uproar caused by Lewis’ book to renew their push for a transactional tax on trades, of around 0.25%, which many experts say could sound the death-knell for high-speed traders. “These [high-frequency trading firms] don’t really add any value,” said U.S. Rep. Keith Ellison (D-Minn.) in an interview about the legislation he has proposed in the House. Another similar House bill and one in the U.S. Senate are also proposed.
The biggest question being asked by every HFT industry watcher, whether critic or fan, is where is all this going? Are there going to be new regulations to address the perceived problems in the HFT industry? Is there a way to keep the benefits, like liquidity and cost savings, while mitigating some of the risk, volatility and abuse?
Not surprisingly, all these questions has left the HFT industry a bit off-kilter and sounding not just a little defensive. “Speed is not a weapon,” Peter Nabicht, a spokesman for Modern Markets Initiative, an HFT industry group, told the Chicago Tribune recently in yet another defense of the industry.
In the forthcoming issue of Traders, we will look at the possibility of new HFT rules and most importantly, what these rules could look like and how they could impact the markets and HFT firms.
