Good to see that the HFT community is finally starting to educate the regulators and policymakers. As we all know, the debate hinges on whether these firms are really acting as electronic versions of traditional market makers and, if they are, whether they should be subject to some of the same formal market making obligations. In particular, regulators have been gnashing their teeth over the fact that such firms are free to replace their quotes as often, or as “frequently”, as they like. The regulators argue that all this activity creates substantial noise that clogs up data pipes and distorts the true picture of the real price of a stock. In their defence, the HFTers argue that they have the right to re-price their “product” just as often as market conditions dictate and that, anyway, they aren’t breaking any laws.
This prompted me to ask a friend about how all this worked in the good old days of manual markets and traditional market makers. In response to this question, he paused for thought and then replied that, in those days, your quote was valid “whilst your breath was still warm.” Basically, this was just a poetic way of saying that it all depended upon a bunch of factors – how fast markets were moving, the instrument in question, the client, and even the different nature of individual trading floors and exchanges. Seems like the regulators might struggle, then, to impose an absolute time frame for quote validity in today’s world as any level is destined to be wrong in most cases, most of the time. If they are determined to impose absolute limits, then why not do it the other way round, i.e. say that HFTers can pull their quotes just as often as they like but there is a certain minimum time period before they can resubmit a quote? This idea was put to me the other day and, whilst it sounds like a subtle change, it would seem to provide a fair and equitable solution to the problems of both the HFTers (namely having to trade on a bad or stale quote) and the trading community at large (noise and clogged data pipes).
Irrespective of the merits of this approach, solutions that are fair and equitable on all market participants should be the mantra of the regulators. This means divorcing themselves from the politicians and accepting that perhaps the best they can ever hope to achieve is a solution that leaves everyone equally unhappy.