Conference Presentation, Panel, Fireside Chat
Trust and the Markets: A Debate on High-Frequency Trading
Milken InstituteJim McCoggin, Rishi Narang, Katie, Amy Goodman, David Brooks, Jim Lecinski, Mark Blyth, Jr., Steve
- High-frequency trading (HFT) profitability peaked between 2009 and 2012, with 2013 estimated at approximately $1.1 billion, while aggregate profitability across all trading types remains below 0.1% of the face value of trades; performance declined after 2010 due to competition, regulatory improvements, and lower volatility.
- Market participants estimate HFT profits average around 0.01 cents per share, with a two-cent profitability differential existing between being first versus last in the order book, driven by the ability to process market-moving information faster than competitors and the average order resting time of two to three seconds.
- Structural concerns include "funky order types," front-running schemes utilizing rapid-fire "pinging" cancellations to detect activity, and the use of the law of large numbers to execute trades across multiple exchanges, practices attributed to deficiencies in Reg NMS and the ban on locked markets.
- Proposed regulatory reforms focus on ending the ban on locked markets to eliminate front-running appearances, improving the speed of the SIP to match direct feeds, restricting rapid-fire order cancellations through potential one-second trading intervals, and establishing rules for dark pool visibility while retaining them.
- Infrastructure and market structure adjustments suggest eliminating co-location to avoid proximity spirals, reducing complexity by removing payment for order flow, and allowing market forces to determine technical capabilities, such as allowing exchanges to penalize excessive cancellations without artificial structures.
- Litigation risks are anticipated to increase, with the Providence lawsuit targeting banks, brokerages, and HFT firms, potentially yielding results if the suspected number of bad actors is validated, though immediate welcome for such legal action is not expressed.
- Future market expectations include IEX potentially becoming a technically registered exchange with listing capabilities and the continuation of dialogue over additional sessions to refine regulations regarding rapid-fire trading and data transparency.