Part II: Q&A with Tradebot's Dave Cummings
Traders Magazine Online News, June 4, 2010
Days after the so-called flash crash on May 6, veteran high-frequency trader and exchange entrepreneur Dave Cummings sat down with the entire Traders Magazine staff to discuss a bevy of issues facing the equities markets. Cummings started the pioneering high-frequency trading firm Tradebot Systems out of a spare bedroom in his house 11 years ago. He remains its owner and chairman. In 2005, Cummings launched the electronic communications network BATS Trading. Today it's the third-largest equities exchange. Here is part two of our interview with Cummings.
Dave Cummings, Tradebot
Read the first part of the Cummings interview
Traders Magazine: How about "trade at?" This would require internalizers to have more skin in the game, have a quote up. If they do want to internalize the order rather than send it to the public markets, they have to price improve or sweep the limit orders on their books?
Dave Cummings: I think that has some problems. You need to think about that very, very carefully. There's a balance in the markets today, and it's not a bad balance. In a lot of ways, dark pools are a cleaner form of internalization. So, having a broker-dealer match their customers off using an ECN-like dark pool, that's better than having it done manually on someone's desk. It does a better job of maintaining information barriers among the customers, and so the market structure has allowed some thoughtful new models. Maybe there should be some discussions about how to bring back a little more of the liquidity to exchanges. But you have to be careful. There are multiple forces that are each trying to get a competitive edge. You have to ask yourself if they're trying to squeeze out these dark pools on theoretical grounds or for competitive advantage. It doesn't seem to be horribly broken. Maybe there can be some small tweaks. We do not internalize. We don't deal with customer flow. All these comments are in the context of Tradebot.
TM: But firms like yours feel that they're being put at a disadvantage because good retail flow is being stopped at big brokers. It's not reaching the public markets.
DC: It's an old argument. It would certainly be good for me if they'd just inject all these orders in the public markets. But it's a long-standing practice. The advantages and disadvantages have been debated over the years. And they've allowed it to be the way it is. Interestingly, in futures, it's not that way. They don't allow internalization in futures. ...
TM: They say the retail customer would end up paying more because you have to pay access fees as they pass through, and you wouldn't get price improvement. And under the SEC's idea, the internalizers would be forced to pay a tick price improvement. Now they get a quarter-tick or half-tick, or something.
DC: Paying a full tick effectively bans internalization, or bans a fair amount. So let's not call it something it isn't. A lot of these markets are a penny wide. The increments are big--you can talk to the wholesalers and see what they can do--but I don't think economically they can price improve by a full penny, in very few cases. So, I think you're effectively talking about a ban on internalization. But, again, that's not my war.
I don't think the public is clamoring for price-improvement. I think it's more about liquidity and certainty.
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