Good afternoon,
Today on The Latest, the Modern Markets Initiative (MMI) shares two recent pieces by PDQ Enterprises CEO Keith Ross and FIA EPTA Chairman Mark Spanbroek dispelling myths currently associated with high frequency trading and explaining how technology has lowered costs and improved access for end investors in today's markets.
We hope you enjoy reading these posts and are always open to feedback and other views.
- The MMI
Following the release of Michael Lewis's book Flash Boys, the role of "middlemen" in the marketplace has come under scrutiny.
The fact is our financial markets have always had "middlemen" coordinating trades between market participants. Even 20 years ago, these middlemen were part of an exclusive group of floor traders that closed off access to average investors. However, thanks to investments in technology and high frequency trading practices, in recent years middlemen have reduced transactions costs and improved access more than ever before for the average investor.
As FIA EPTA Vice-Chairman Mark Spanbroek explains in a new blog post, middlemen provide an extremely valuable role in today's market structure, especially for end investors, much like in other industries:
"While it is true to say that technology, particularly the internet and digital communication, has radically reshaped the way we all do business (not just in the financial markets), it would be wrong to say that middlemen are no longer needed. Certainly there are fewer middlemen, supply chains have been simplified, and the number of links between the two ends of a purchasing chain have shrunk, to the great benefit of all those concerned at the ends of the chain; yet very rarely can we do away with the middleman completely.
…
"Similarly, whereas once we had to go to a travel agent to be able to book a holiday, now we can simply go online, looking for the best possible deals for our flights, hotel, car hire etc. There are far more competitors for this business, with individual and aggregated / comparison sites (middlemen), as well as the ability to book directly from the airline or hotel (no middlemen at all), cutting out the need to pay travel agent's fees. The travel agent still exists, but more and more of their business is to provide a combined version of these services online, or to provide a custom-made holiday plan for a more comprehensive package.
"The internet has reduced the cost of many day-to-day consumer purchases, by replacing middlemen with cheaper alternatives (often due to greater competition) and in some cases removed them completely, bringing customers into contact with the manufacturer. And while this has changed the way we do business, accepting the new technology as part of our everyday lives brings a lot of benefits and keeps us primed for future innovation."
- Mark Spanbroek: "Squeezing the Middlemen"
Friday, June 20, 2014
Continue reading here.
In a new commentary for Traders Magazine, PDQ Enterprises CEO Keith Ross takes on some of the top myths being promulgated about our financial markets following the release of Michael Lewis's book Flash Boys.
One of the top myths is the claim that high-frequency trading is only successful because of its speed and rebates. However, according to Ross:
Myth #3: High-frequency trading is successful because of its speed and rebates.
Actually, HFT has been successful because it provides a needed service: liquidity. HFT traders are willing to take short-term inventory risk so that they can offer immediate executions to those with a natural demand to buy or desire to sell the asset in question. When high-speed traders are successful it is because their algorithms have excellent risk management capabilities and perfect discipline. The faster they go, the faster they can adjust their risk and make better trades. The rebate issue is simply a function of where high-speed traders are going to be paid for their service of providing liquidity. If regulators eliminate the maker/taker model, the high-speed group would instead make their money through wider spread capture.
Think of it this way: If you go to a restaurant in the U.S., when the bill comes you add the tip, similar to a take fee. If you go to a restaurant in Europe, the service fee, or tip, is automatically included in the bill rather than itemized and collected separately. Without rebates or take fees, the European dining model would prevail. Traders would see net prices, but liquidity providers would still make profits. The existence of the "maker/taker" model doesn't create the HFT industry any more than the "menu price + tip" model creates the restaurant industry.
- Keith Ross: Dispelling Myths About Trading
Friday, June 20, 2014
Continue reading here.
About the Modern Markets Initiative (MMI):
The Modern Markets Initiative (MMI) was organized in 2013 by leading quantitative trading firms to engage and educate public audiences about the value modern market professionals provide to today's electronic marketplace.
Modern Markets Initiative (MMI) members: Global Trading Systems (GTS), Hudson River Trading (HRT), Quantlab Financial and Tower Research Capital.
Modern Markets Initiative, 1667 K Street NW Suite 520, Washington, D.C. 20006 United States
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