John McPartland of the Chicago Fed has released a new policy discussion paper: Recommendations for Equitable Allocation of Trades in High Frequency Trading Environments. The paper makes “nine recommendations, that if implemented would likely restore the perception of fairness and balance.” John McPartland is knowledgeable and rational, so his recommendations should be taken seriously and debated by the industry. However, we must keep in mind that any resulting changes should be carefully considered, data-driven, and do no harm.
We must constantly strive to perfect our market, and we can certainly do better, however, today’s markets are not broken or rigged. The markets have never been better for end investors. Costs are low, spreads are tight, and liquidity is plentiful.
Investment managers will tell you that the current state of electronic markets, including high frequency trading, is beneficial to their customers – the end investors. Here are a few representative quotes:
BlackRock recently wrote: “[Electronic market making] brings tangible benefits to our clients through tighter spreads.”
Gus Sauter, who was Chief Investment Officer at Vanguard said: “Generally speaking, high-frequency traders provide liquidity and “knit” together our increasingly fragmented marketplace, resulting in tighter spreads that benefit all investors. We believe that a vast majority of “high-frequency trading” is legitimate and adds value to the marketplace.”
Cliff Asness of AQR Capital Management wrote: “How do we feel about high-frequency trading? We think it helps us. It seems to have reduced our costs and may enable us to manage more investment dollars.”
Even Ronan Ryan, a protagonist of Flash Boys, had this to say about high-frequency trading: “They have made the markets far more efficient in that regard and it’s great for everybody, from brokers all the way down to the mom-and-pop shops. It’s fantastic.”
It is clear that the evolution of the electronic marketplace and the rise of high-frequency trading has greatly benefited investors. It is also clear that our markets are not perfect. Any and all changes to market structure must ensure that we do no harm and do not reverse the benefits we have gained from electronic trading over the last decade.
The market is well-served by SEC Chair, Mary Jo White who understands that changes must be made with caution. As she recently said:
“Addressing the issues of our current market structure demands a continuous and comprehensive review that integrates targeted enhancements with an expansive consideration of broader changes. But we must not ignore the largely positive evidence of market quality. That reality demands careful study and deliberate action when considering fundamental changes.”
The SEC, with its data-driven approach and recently announced pilot programs, is taking a step in the right direction. Any possible changes that arise from suggestions such as Mr. McPartland’s should continue down the same path: thoroughly discussed, backed by data, and only implemented if they truly improve the markets for investors.
– The MMI