The publication of Michael Lewis’s new book Flash Boys has reignited the whole HFT/dark pool debate (actually, maybe it’s never really gone away). The point people seem to continually miss in this debate is the distinction between “unfair” and “rigged”.
To me the term rigged implies some malevolent conspiracy between certain members of an ecosystem aimed at taking advantage of an identified target. In this instance, the ‘patsy’ in question is supposed to be the retail punter and the ‘conspirators’ are the electronic trading firms that exploit the little guys’ inability to act as quickly as they can. Isn’t this just part of the natural world order of winners and losers, especially in a free market economy? Firms that invest their own money in technology to exploit the fragmented nature of markets deserve to make a profit just as much as anyone else.
The argument goes up a notch when you consider the institutional investment community, some of whom complain that they are left chasing a trail of small droplets of liquidity laid down by the HFT boys across the lit/dark spectrum. My response to this, as demonstrated by those more technology-savvy buy-side firms, is tool up and get into the fight. The only other alternative would be to replace the capitalist underpinnings of financial markets altogether, but in this case those same investment firms probably wouldn’t be needed at all…
Most US retail flow gets sold to internalisers so doesn’t even hit the lit market that is supposedly rigged anyway. Contrast today where anyone that can buy a dell and programme it can ‘make markets’ against the old NYSE floor traders who paid millions if not billions for the right to have a 30 second look at all the flow before deciding whether to make a price or not. That all ended with Dick Grasso leaving NYSE and the SEC charging many of the old floor traders with fraud.
So the markets may not be perfect today. But they are immensely better than 20 years ago. Technology has been the enabler.
Thanks for the comment Tony. It seems like there is a growing view that chimes with ours. Larry Tabb wrote a similar piece yesterday too http://bit.ly/1fOsmm5.