WASHINGTON, D.C. – Knight Capital “immunizes” retail orders from “some of the activities” that take place at marketplaces where professional trading firms try to outrace each other to get to an order, the market maker’s chief executive said Friday.
When a market maker takes in order flow from retail brokerages, the orders do not go directly to exchanges or market centers known as “co-locaton facilities,’’ where trading firms that rely on systems running at microsecond speeds to beat each other to the matching engines of exchanges, with servers placed as close as possible to those engines, under the same roof.
When “your retail order is routed to NYSE, we take it,’’ he said at the market structure conference of the Security Traders Association. “We internalize it. It doesn’t go to an exchange. It doesn’t go to some co-lo place. We internalize it immediately, it’s done.”
Not only is that order kept away from the high-speeding trading at exchanges and their co-lo facilities, matching orders internally means “we do it at a better price than the one on the screen,” he said.
“So the retail investor is immunized against some of the activities at some of these locations,’’ he said.
Knight also assumed liability on August 1 for the flood of erroneous orders its own software released onto exchanges. Taking on that burden meant that the company took a $440 million loss for the 45 minutes of errant trading. That nearly sunk the firm, before it was able to bring in a series of investors, led by Jefferies & Co.
“We can hold our head high,’’ he said, about how the firm handled its near-death experience.
The automation of stock markets has provided demonstrable benefits to retail and other investors, said Brian Conroy, president of Fidelity Capital markets, even though events such as the Knight incident, the May 6, 2010 flash crash and the delayed and disrupted handling of orders on the first day of trading of Facebook shares this May have raised concerns about the stability of high-speed operations.
Processing and confirming an order, from the time the buy button is pressed, took 17 seconds a decade ago, he said. That is now down to under one second.
The spread between bids and offers on trades are down 50% and price improvement is up 100%, he said.
“One would argue that this is a terrific marketplace,’’ he said. “We need to understand context.’’
Joyce said the number one challenge before the securities trading industry now is repairing the perception that somehow the retail investor is being hurt by what’s going on in all this machinery when it operates as it’s supposed to and when it doesn’t.
All brokerages, market makers, exchanges and participants in the industry have to adopt a “culture of compliance” and demonstrate that they are adhering to it, to win back the estimation of the public that financial markets are a “paragon of integrity.’’ And the firms that make up the industry, each and severally, need to actively educate the public on how modern markets actually operate.
“There are too many nasty headlines out there,’’ he said, “and too many of them are self-imposed.”
But, he said, “to say the market is rigged is completely wrong.’’
