–Retransmitting Story Published 13:15 ET Friday
By Denny Gulino
WASHINGTON (MNI) – Within 13 exchanges and a few dozen dark pools,
the constant blizzard of high-frequency trades ricochet around the
stock markets, and increasingly other markets as well, in an unfettered
free-for-all that scares a lot of people in Washington — and now
Washington is returning the favor.
As the defenders of high frequency trading traipsed to Capitol Hill
this week to make their case, on the other side of town regulators
listened industry representatives report on progress in fashioning a
working definition of automated high-speed trading. It is that
definition that many high-speeders see eventually becoming the noose
around their collective necks, a key to regulation they could find
stifling.
Meanwhile, at the Labor Department, where a fever of speed-aversion
appears to have already taken hold, one familiar name — Nasdaq OMX —
has become the victim, cut off from breaking data.
“They haven’t told us this is going to be the forerunner of
regulation,” Larry Tabb, CEO of the Tabb Group capital markets
consultancy, told MNI of the discussions of definition. But, he added,
“It’s a CFTC subcommittee and the CFTC is a regulatory body.”
He is one of those participating in the CFTC’s advisory committees
on high-frequency trading and spoke from the Federation of European
Securities Exchanges convention under way in Istanbul. His firm is a
capital markets research and advisory consultancy with a special
expertise in the area of automated trading but which does no trading.
Amid the charges and countercharges about automated high-speed
trading, Tabb said there is increasingly a need to make an crucially
important distinction, one that makes clear the difference between speed
and manipulation.
“What I hope comes out of it, is that the focus becomes less about
‘fast’ and more about market abuse,” he said. “Because there are very
legitimate, proper trading strategies that employ speed, including
market making and index arbitrage, as well as other kinds of arbitrage.
“When machines do the trading, by definition everything is fast,”
he said, and yet, “We have to figure out what’s manipulated or not
manipulated, not whether we’re doing it fast or not.”
Some have complained that the working definition of high-speed
trading being developed at the CFTC is being written too broadly and
captures too much.
“Some folks have seen some of our documents and said they were
exceptionally broad,” Tabb said. “But if the definition’s too narrow, it
will be gamed. It is intentionally broad with the anticipation that we
and the other groups will define it further as we move forward.”
“Our goal, our express desire,” he said, “is to try to create
something that doesn’t taint all strategies that employ speed as bad,
that tries to get the world to understand high frequency trading is just
a fact of life, that we have to better understand the underlying
strategies, determine whether the underlying strategies are good or
bad.”
As reported by MNI Wednesday, the House Financial Services Capital
Markets subcommittee placed high-frequency trading under a spotlight.
Summoned to testify on the subject of “Market Structure: Ensuring
Orderly, Efficient, Innovative and Competitive Markets for Issuers and
Investors,” were executives from GETCO, Invesco, Rosenblatt Securities,
Knight Capital, Quantlab Financial and others.
Several put on the record their defense of high-frequency trading,
saying it is a valued way to improve market functioning for everyone.
Their testimonies are all available on the subcommittee’s Web site.
As Knight Chair Thomas Joyce said, “virtually every dimension of
U.S. equity market quality is now better than ever.”
Judging from their published comments afterward, as civil and
courteous was the questioning of the committee, the day was still a
scary one for many of those in the high-frequency and algorithmic space,
unaccustomed to the glare of close attention from Capitol Hill.
CFTC Chair Gary Gensler spelled it out Wednesday: “Regulators
cannot assume that the algorithms in the markets are well designed,
tested or supervised.”
Perhaps his most chilling words, for those with a stake in the
expensive pursuit of high-frequency execution of trades, were when he
said the CFTC “is reviewing a rule on the reporting of ownership and
control information for trading accounts. These rules would enhance the
Commission’s surveillance capabilities and increase the transparency of
trading to the Commission.”
A Labor Department official made explicit in testimony to the House
Government Oversight Committee June 6 that its data, like the monthly
jobs reports, are being traded on “through algorithms, which is not the
purpose of the (data) lockups.”
He was referring to “lockups” that are usually half-hour sessions
in which reporters view the data in advance and then simultaneously
release it to the public under close supervision at a set time.
Fearful that somehow automated trading operations could benefit
unfairly from data releases, the Department has been in the process of
imposing much higher security procedures on news firms that report the
data like MNI, the Associated Press, Reuters, Bloomberg and Dow Jones.
In that process, the Department has denied access to four other
firms to its data lockups, including jobs and inflation numbers. One of
those cut out is the 117-year old Bond Buyer newspaper and wire service
that serves the municipal securities industry, including the state,
county and local community treasurers who issue securities to finance
public infrastructure.
The Bond Buyer’s business partner, Nasdaq OMX, has been including
Labor’s numbers in its package of data feeds since late last year.
The Department has given no reason for the exclusions and a
spokesman did not comment when asked, nor have any of the explanations
for the changes to the lockups spelled out that algo providers were the
subject of the tightened security.
Others excluded were Need to Know News — a firm owned by MNI —
RTT and Thomson-IFR. Most are attempting to appeal the cutoffs,
effective July 5.
As the CFTC and the SEC only slowly erect their regulatory guard
rails around high-frequency trading, the exclusions of some news firms
from data lockups have focused new attention on the extent — if any —
to which government agencies should accommodate the information firms
that have such traders as customers.
As MNI reported last month, some high-frequency trading operations
unleash intense trading activity moments before major data are scheduled
to be made public, hoping to stir up premature volatility and trading
opportunities, but at the same time giving regulators the false
impression they have learned the key numbers ahead of time.
As MNI has also reported, some analysts have suggested that key
government data release times be made random within certain limits, to
make such pre-release trading more difficult.
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MAUDS$]
