Does It Affect You? If You Believe in Free Market Capitalism It Does

Today on CNBC, a guest said HFT doesn’t affect long term investors.  He said that they should be “all in” when it comes to stocks because of QE forever. He says, “If anyone can make a few pennies on a trade, what does it matter?”.

At any given moment in time, it probably doesn’t.  On a trade by trade basis, it probably isn’t that meaningful.  However, in aggregate, it’s pretty huge.  If I am a pension fund managing money for my constituents, over the course of time I could lose millions.  That means the people invested in my fund will have less money to spend.

The core beef here seems to be that we have electronic markets.  But that’s not the beef.  It’s not about Spread Networks, or if orders are entered through a machine or human.  Electronic markets are a great development if structured properly.  The playing field should be flatter.  In fact, today the playing field is tilted in favor of a few. That tilted playing field is taking billions of dollars risk free from people that are taking risk.  That’s how it affects you.  All of this can be fixed.

Later in the day, there was a very good argument.

This debate showed some of the crux of what I have been writing about since I started blogging. Transparency. Just because a rule is on the books doesn’t make it just or correct. Otherwise, why march against Jim Crow? As the current rules are structured, HFT isn’t doing anything wrong. Except, they are skimming the market risk free.

Exchanges that have gone for profit turn a blind eye because they are more interested in volume than running a clean transparent market. Regulators also stacked regs against them. That’s why on the SEC side of the business, most of the volume has migrated away from established exchanges and into dark pools that are run so their owners can skim. BATS is a dark pool for Direct Edge.  They skim off every order that enters there.

For most people, this is all very inside baseball. But, these kinds of imbalances ruin the core confidence people have in capitalism. Americans have a sense of fair play. We like to compete. But, when the rules of the competition are favoring one class over another in a deliberate way, the sense of fair play goes out the window.

We are forced to become cynics. That’s not a good path to start down.  Loss of trust and good faith will undermine society.  Look at our political debate today.  It’s dysfunctional.  So are the public markets.

This is one of the reasons we put industry people on $CME’s board in the first place. They are being drowned out in the board room. CME doesn’t enforce rules or fees equally now. Imagine if the industry didn’t even have a voice.

Transparency is great. Today we had a very transparent debate on CNBC. I’d love to hear more from the buy side. They are finally awakening to the fact that every single order they send to the market is gamed. Every single one. They are being told they see the best price, but they don’t.

What can we look for?

Studies financed by proponents of the way things are stating that the structure has no effect.  Politicians making pronouncements as a warning sign not to bring action or change policy.

The other side can’t win the debate on the facts.  They will try to win under the table.

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