While “Flash Boys” author Michael Lewis calls the US equities markets “rigged” thanks to high-frequency trading, the founder of market research firm Tabb Group begs to differ.
Larry Tabb, founder and CEO of Tabb Group, offered a rebuttal on his site this week.The following is a selection of Tabbs analysis on Lewis allegations.
[Heroes or Opportunists?Meet the Brad Katsuyama and his IEX teamfrom “Flash Boys.”]
On Market Fragmentation:
While the markets are complex, they are not rigged. Our fragmented equity execution framework is the definition of a competitive market, where competition has made trading much less expensive, faster and more open, writes Tabb. The inexpensive cost of execution today allows retail brokers to support sub-$10 trades and institutions to pay under $0.008 a share for electronic execution. In addition, average effective spreads are down and investors are in much more control of their execution than ever before.
On Price Discovery:
While virtually everyone hates speculators, the fact is that they do form what is one of the most important functions of a market – determining price. Market makers, speculators, proprietary traders, HFT – no matter you call them – stand willing to buy and sell virtually 8,000 US equities across the trading day, providing quotes to the market, which forms the basis of price discovery, writes Tabb.
While Brad Katsuyama of IEX, featured in the 60 Minutes segment, is right that differing latencies and a fragmented market creates market leakage, this in no way means that the price of any given stock doesnt reflect the current supply and demand. I might add that even this leakage is on the decline, argues Tabb.
On HFT earnings:
In 2009, TABB Group estimated that high-frequency firms generated approximately $7.3 billion from US equity trading; today, that number is approximately $1.3 billion. During this period, less volume, less volatility and better efforts from brokers as well as algorithms have helped investors protect their clients savings, according to Tabb.
On the SECs role:
As to the question of whether the SEC should restrict markets, we are on record at TABB Group in research reports, the financial media and Congressional testimony saying yes. We also have believed, and said so publicly, that there were too many exchanges, too many dark pools and too many internalizers. However, if the SEC had placed a limit on matching venues, would new markets have been developed? Would they have had enough funding to buy an ATS license? But one thing is certain: The ability to bring new ideas to the market is a hallmark of the US equities markets. If the SEC limited licenses, then new platforms would have a harder time coming to fruition, writes Tabb.
On the power of investors:
No, Mr. Lewis, the markets are not rigged. They are intermediated and possibly not effectively brokered. But information, analysis and choice are an investors most powerful weapons, which is why you should analyze your trading data. If your managers, brokers and/or trading venues are not doing their job, leverage your choice and send them a message – youre fired.