The CFTC/HFT Rumors and Some Reflections
|Sep 2nd, 2013 | Filed under: Algorithmic and high-frequency trading, Commodities, Regulatory, Today's Post | By: cfaille||
We will suppose that you, dear reader, have imposed a certain rule or structure: we’ll just call it A. This has undesirable consequences, such as B and C. What to do about B and C? In general, shouldn’t your first thought be to lift the rule or remove the structure A?
I’m thinking such thoughts because there are plenty of press reports just now, based upon the usual anonymous sourcing, that say the Commodity Futures Trading Commission is about to announce something big on high-frequency traders, the folks whom some at that agency have nicknamed “cheetahs.”
The “something” will presumably come in the form of a concept release listing various options about how to control, or minimize the abuses associated with, HFT.
Certainly the general sense that robots are getting out of hand, and they aren’t all acting in accord with Asimov’s rules, will have been heightened by the foul-up at Nasdaq last week. Trading on Nasdaq listings came to a dead stop for three hours August 22d because … well, as usual, it isn’t exactly clear just why. But it has something to do with computers, surely.
There has also been some unpleasantness at Goldman Sachs.
Free the Ticks & Rethink NMS
But back to the forthcoming concept release: assuming for the sake of discussion that the anonymice scurrying about and on the line with Bloomberg and Reuters are telling the truth and a concept release does arrive, it is a safe bet that it is unlikely to propose what common sense suggests – it is unlikely to call for the removal of the underlying restrictions. This is in part a matter of inter-agency diplomacy: the CFTC will not want to issue a paper saying “the SEC has to change its rules.” But, more than that even, it is an object lesson in How States See.
Let us recall that high-speed trading thrives in a world of mandated small/decimal ticks, of a mandated National Market System, and – a new addition to the menu – of a closed quantitative analysis platform (MIDAS).
The phrase “free markets” is at its best not an adjective and a noun at all, but a verb and an object: let’s free markets. Let us not try to address the problems with HFT by adding new restrictions. There are real problems with HFT as currently practiced, but they are the consequence of some of the existing restrictions, and the former can be resolved by removing or significantly reworking the latter, by for example allowing exchanges or listing firms or a contractual decision involving them both to decide upon the tick size on a security-by-security basis.
In 2010, Reginald Smith wrote a paper asking, “Is high-frequency trading inducing changes in market microstructure and dynamics?” Not only did his paper offer a clear “yes” answer to that question, it suggested a causal relationship.
“We can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics….This increase becomes most marked, especially in the NYSE stocks, following the implementation of Reg NMS by the SEC which led to the boom in HFT,” Smith wrote.
But we could go further, or the CFTC could conceivable go further, and adapt to the 21st century by freeing code and information.
Almost a year ago now the SEC contracted with an HFT firm, Tradeworx, and asked it to build software that will allow the regulators to track stock market data in real time, thus allowing it to keep up with HFT. (And, yes, if you’re reminded of an old story about a fox and a chicken coop, you aren’t alone.)
This June, Gregg E. Berman of the SEC’s Office of Analytics and Research, Division of Trading and Markets, boasted about the results of that experiment when addressing a SIFMA TECH Conference in New York. He also said that the name MIDAS is backronym rather than acronym. You might call the Tradeworx product the “Market Information Data Analytics System” if you like, but the SEC folks responsible for that mouthful “picked MIDAS first and then figured out what the letters meant afterwards.”
The idea behind MIDAS is that the public feeds create a consolidated tape that includes in real time the execution of every trade of 100 shares or more, whether executed on or off a public exchange. This will allow, he says, for the monitoring of market activities, forensic analysis of market events, and market structure research.
As consultant Dave Lauer has pointed out, though, the resulting MIDAS , executed by a “small and resource-constrained staff” isn’t a game changer. What might be? Lauer suggests the SEC embrace “the principles of the open source movement, and make it cheap and easy to perform studies on market data….”
Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."