Kevin Cronin, director of global equity trading at Invesco, recently offered his views on high-frequency trading and potential new rules for dark pools. His comments came during an Investment Company Institute Web seminar in November.
On why the SEC should not require the identification of which dark pools executed trades in real time–
We [currently] have a fighting chance that [predatory traders] don’t know where we are–prints just hit the tape with a third market modifier. … But under the SEC’s proposal, they would know specifically that it was Goldman’s Sigma X. … If you’re a high-frequency trader, you’d just simply look at the tape and say, ‘Aha, 500,000 shares just traded there, I think I’ll go in and ping the system a couple times and see what order is in there.’ That absolutely is not good from an institutional perspective.
On some of the consequences of high-frequency trading–
How much activity [from high-frequency traders] is ‘good’ and really serves to lessen the transaction costs? And, frankly, how much of it serves to continue to exacerbate the problem of institutions having to hide their orders? … If no one wants to quote, and fewer and fewer brokers or exchanges are out there showing their quotes, what’s the value of a quote? And [since] so many of these crossing networks and dark pools predicate their pricing on the publicly displayed quotes, how would any of us feel we had an efficient marketplace?
On the downside to the marketplace of traders using dark pools–
It does not promote price discovery and transparency. To the extent that everybody is hiding their orders in these dark pools, you don’t get a good interaction of buyers and sellers meeting and competing for price. So the whole notion of the value of the quote could certainly be at issue. More practically, from our standpoint, we get the argument that we have to be there because that’s how the game works today. But these things can be gamed. High-frequency traders and others can ping their orders into the system and try to guess what’s in there.
On the use of actionable indications of interest by dark pools–
When actionable IOIs are sent to a select group, they’re getting a free option, a free look, on orders coming into the system. That’s information. In a marketplace that doesn’t convey huge amounts [of information] about supply and demand, getting that information can help [those firms] make a better decision. Just because you’re in a dark pool doesn’t mean you’re protected. I don’t care what execution venue you’re in, what broker you’re with, what exchange you’re in–you always have to assume that somebody somewhere is looking over your shoulder and trying to take that information and benefit themselves.
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