The speed and complexity of modern stock markets is partly driven by long-term investors who have adopted strategies pioneered by high-frequency traders, according to a top U.S. securities regulator.
Trading patterns analyzed by the Securities and Exchange Commission (SEC) found that money managers use sophisticated computer programs to fill their orders on a variety of private trading venues, including dark pools and over-the-counter markets. Their goals require "an unavoidable increase in the complexity of our markets, and in a very real sense [that] is also driving the need for more and faster technologies," said Gregg Berman, one of the SEC's top authorities on high-frequency trading.
High-speed trading is facing unprecedented scrutiny following the publication of Michael Lewis's book, "Flash Boys," which argues that the practice has helped rig the U.S. stock market. In a speech yesterday in New York, Berman didn't mention Lewis's book directly but said the current debate is "too narrowly focused and myopic."
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"If there are things we want to change about our market structure, we must look at both sides of this equation, including why and how market participants on both sides interact with the markets," Berman told the North American Trading Architecture Summit in New York. "Focusing separately on just one or the other misses the entire point of how buyers and sellers are brought together."
Berman is one of the SEC's policy advisers on rules that affect high-frequency traders, dark pools, and other elements of computerized trading that evolved after years of regulatory changes and advances in technology. The SEC is facing pressure to respond to Lewis's claims as regulators insist they are studying all aspects of market behavior, not just practices of high-speed traders.
Berman's office is drawing on data from a more robust market-data feed, known as Midas, as it conducts its review. In his speech yesterday, Berman said the market may not be moving too fast because data shows investors are able to access even the most short-lived quotes.
While 23 percent of orders are canceled within one-twentieth of a second, approximately 19 percent of all trades happen during the same time window, Berman said.
"Solutions that simply attempt to address the speed of cancellations are likely missing half of the speed story," he said.
BlackRock Inc. (BLK), the world's largest money manager, said in an April 8 policy report that predatory high-frequency trading activity mostly affects institutional, not retail, investors.
"'High frequency trading' encompasses a wide variety of trading strategies, and care must be taken to differentiate predatory practices from practices that benefit end-investors," BlackRock said in the paper.
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