While panelists on todays SEC technology roundtable
argued about whether high frequency trading adds or takes
liquidity, Larry Tabb, CEO of TABB Group, is demanding more
tangible measures by calling for a reduction in the number of
computerized trading systems.
The panel was called to help the SEC address problems with
high frequency trading, and Jamil Nazarali, head of execution
services at Citadel Securities, a subsidiary of the Chicago
financial firm headed by Ken Griffin, surprised the audience
with his denial that high frequency traders, who use
sophisticated computer systems to execute stock trades in
milliseconds, are primarily engaged in exploiting small price
differences in equities. He complained that that most press
coverage of high frequency trading treats the practice as
predatory or abusive.
Most of our focus is on trading strategies aimed at
adding liquidity to the marketplace, not the pursuit of small
price advantages, as the headlines suggest, Nazarali
That drew a rejoinder from fellow panelist Dave Lauer, a
consultant with Better Markets, a Washington, D.C.-based
not-for-profit, and a former high-speed trader at Citadel.
Lauer reminded the panel that the SEC had found in its study of
Flash Crash of May 6, 2010, most traders had
taken liquidity rather than added it during that
days market meltdown. That afternoon the Dow Jones
Industrial Average lost 600 points in five minutes only to
recover most of them two minutes later.
Lauers view was seconded by Tabb who told
Institutional Investor in an interview in anticipation
of the roundtable that high frequency trading never adds
true liquidity, since the firms involved have no
obligation to support prices when other market participants are
selling, and therefore typically dont.
What HFT does provide, said Tabb, was price transparency,
even if prices move one way or another in response to
traders efforts to arbitrage small differences in those
of stocks listed on different exchanges.
The problem, in Tabbs view, was that such movements
had led to such narrow spreads between bid-ask prices that
there was little incentive for banks and other market makers,
which do have an obligation to support prices on behalf of
their clients, to take part in stock trading. Many have
abandoned market making of late, in part because of the
dominance of HFT.
Tabb contends that the SEC should seek to reverse that by
narrowing the universe of computerized trading systems. The
commission could do that, he explained, by licensing fewer new
ones or withdrawing the licenses of marginal players. Tabb
noted that there currently are approximately 90 such systems,
known as alternative trading systems, of which he said almost a
third are immaterial.
Tabb argued that such a limit would have fewer unintended
consequences on trading than heavier-handed regulatory
attempts, including transaction taxes and circuit breakers, to
prevent further price swings like that of the Flash Crash.
Ironically, the SEC cracked down on alleged collusion among
members of the National Association of Securities Dealers in
the 1990s to keep bid-ask spreads wide.
Guys were being taken away in handcuffs, Tabb
recalled. But maybe they were doing the right