Chronicle of the Conspiracy
Saturday, August 29, 2009MORE "FLASH" TRADING Even Chris Hynes won't have an answer for this! Thanks to reader Mark Spahn.
Posted by Donald L. Luskin at 7:16 PM | link
Friday, August 28, 2009HYNES ANSWERS THE CRITICS ON "FLASH" TRADING My co-author of yesterday's Wall Street Journal op-ed weighs in with some great points:
As a co-author of the original article, I want to thank all the commenters for their interest and willingness to take time to debate this issue. Many of you have raised points which get right to the heart of the issue. In my own career, I have been a sell-side (brokerage) trader in both derivatives and equities, head trader of the what is now the world’s largest asset manager, co-creator of the POSIT alternative trading system, portfolio manager, and retail investor. As I read the comments, I observed a few themes that I’d like to address: the fairness of unequal information in free markets, trading profits , and the nature of front-running. I’d like to address these issues.
Posted by Donald L. Luskin at 11:37 AM | link
Thursday, August 27, 2009FROM OUR TEXAS CORRESPONDENT Thanks, Richard Ridgeway!
Posted by Donald L. Luskin at 10:43 AM | link
Wednesday, August 26, 2009IN DEFENSE OF "FLASH" TRADING My op-ed, with Chris Hynes, in this morning's Wall Street Journal:
For the past several weeks, New York Sen. Chuck Schumer has attempted to intimidate the Securities and Exchange Commission into banning so-called flash trading. Eliminating this technique would be a dangerous mistake that would squash competition and automation in equity trading. Flash trading exemplifies the virtues of two decades of innovation that have improved executions for both individual and institutional investors.
What is flash trading? As pioneered by the electronic communications network Direct Edge, it is simply a way for one customer to query other customers to see if they will take the other side of a trade.
Let's say that among all the exchanges, the highest bid for stock XYZ is 10, and the lowest offer is 10.5. Bob enters a flash order to buy 500 shares in between, at 10.25. This order exists in Direct Edge's system for mere milliseconds, but in that time the high-speed computers of other participants might decide to sell Bob the 500 shares he wants to buy. So Bob gets a price better than the best offer, and the seller gets a price better than the best bid. If a trade can't be executed, then Bob can try other markets.
In this example, because the flash trade comes in between the best bid and the best offer, it does not contribute to market volatility. Buyer and seller have entered into a trade in which they both feel they have achieved the best possible deal, or they wouldn't have traded. And the flash order created an opportunity for new liquidity to enter the market.
Flash trading is like offering to sell your house to your neighbor before you officially put it into the real estate listings. For that matter, it's just like what upstairs traders did in the pre-computer era: shopping an order before sending it to the exchange floor. We had no problem with this process, so why would we ban flash trading, which simply makes it more formal and produces an audit trail that the upstairs traders didn't?
Yet according to Mr. Schumer, in flash trading "a privileged group of insiders receives preferential treatment, depriving others of a fair price for their transactions." The truth is that there's no particular privilege involved. Any broker can enter flash orders or respond to them, even when executing on behalf of ordinary individual investors.
Chris Nagy, managing director of routing for TD Ameritrade, a leading retail broker, has said that his company sees flash trading "working so well that we've increased our utilization of it." It's hard to see how anyone is deprived of a fair price, since a flash trade cannot, by SEC rules, trade through pre-existing orders—that is, it cannot be executed below the best bid or above the best offer.
Mr. Schumer also claims that seeing flash orders allows traders to "act on that early information to trade ahead of the pending orders." Yes, a flash order does reveal information. But so does any order. If flash orders entailed a heightened risk of being front run, as Mr. Schumer claims, no one would ever enter into them.
The real issue here is that innovators like Direct Edge are able to use new systems like flash trading to challenge entrenched institutions like the New York Stock Exchange by attracting their own new pools of liquidity. Innovators profit most when trading is internalized within their new pools, drawing market share away from incumbents. The incumbents typically seek self-protective regulation, characterizing the creation of new pools as "fragmentation" of the equity markets.
In fact, trading innovations do not create fragmentation. They expand the market, drawing in entirely new liquidity that wouldn't have otherwise existed.
Since introducing flash trading in 2006, Direct Edge's market share has soared to 12% from 2%. No wonder, then, that Duncan Niederauer, chief executive officer of NYSE Euronext, said in June that "we're spending a lot of time in Washington." And no wonder that Mr. Schumer has suddenly developed an interest in the microstructure of equity markets.
Competition is what makes America's equity trading system the envy of the world. Let's not throttle it by demonizing the innovations that improve it.
Mr. Hynes is the chief executive officer of Hynes Capital. Mr. Luskin is the chief investment officer of Trend Macrolytics LLC. They are the co-creators of Investment Technology Group's POSIT, the first alternative trading system.
Posted by Donald L. Luskin at 9:40 PM | link
JOKE OF THE DAY 2 I promise... It's not about Teddy. This one is about health care costs (attention Teddy, wherever you are...).
Posted by Donald L. Luskin at 9:49 AM | link
JOKE OF THE DAY
Posted by Donald L. Luskin at 8:47 AM | link
Tuesday, August 25, 2009SOMETHING TELLS ME... ...that Paul Krugman won't be getting his health care at the Veterans Administration, despite his ringing endorsement of it in a column a couple weeks ago.
By the way, our own Veterans Health Administration, which is run somewhat like the British health service, also manages to combine quality care with low costs.You see, news stories like this one just keep coming up...
CHARLESTON, W.Va. - At least 1,200 veterans across the country have been mistakenly told by the Veterans Administration that they suffer from a fatal neurological disease.Thanks to reader Robert Wilson.
Posted by Donald L. Luskin at 10:50 PM | link
NOW IT GETS PERSONAL Now it's not just the Left calling for a boycott of Whole Foods -- they want CEO John Mackey's head, for daring to criticize Obamacare in a Wall Street Journal op-ed. Some pressure group that has given itself the name "CtW Investment Group" (I suspect from their website they "invest" in nothing but union-funded lobbying), is putting pressure on Whole Foods independent director John B. Elstrott to fire Mackey, saying in a letter, "The board must now recognize that managing reputational risk is central to building shareholder value at Whole Foods and act accordingly." Yeah -- and building a great global company from scratch is central to building shareholder value, too.
Update... "The Zoogler" writes,
From their website:Update 2... Reader William Heasley strikes back!The CtW Investment Group is not named fiduciary for any pension or other fund or plan, nor does it render investment advice. The CtW Investment Group does not exercise or seek to exercise any discretionary authority or discretionary control regarding management of any plan, disposition of any plan assets, proxy voting decisions, appointment of plan trustees, or any other aspect of plan management or administration. Although CtW Investment Group strategies and initiatives are thoroughly reviewed for compliance with applicable laws and regulations, the law requires trustees and other fiduciaries to conduct their own review and make independent decisions before implementing or adopting any of these strategies or initiatives.Nice guys, huh?
Personally, never have shopped at Whole Foods. Just never have been to their stores.
Posted by Donald L. Luskin at 9:31 AM | link
Sunday, August 23, 2009THE MYSTERIOUS EAST Our monetary affairs correspondent "Irrational Exuberance" found this gem from Bloomberg at Infectious Greed:
A Chinese government estimate that inflation may be 2 percent for 2009 is puzzling economists after prices fell for six of the past seven months.
Posted by Donald L. Luskin at 11:05 PM | link