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By Sal Arnuk and Joe Saluzzi, Partners and Co-Heads of Equity Trading, Themis Trading
By Sal Arnuk and Joe Saluzzi, Partners and Co-Heads of Equity Trading, Themis Trading
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Keep Your Eye on the Market Structure Ball

Flash Boys has started a simplistic debate about HFT, when the real focus should be on an overly complex and fragmented market structure.

The furor resulting from the publication of Michael Lewis’s Flash Boys has predictably focused on the overly simplistic debate on high-frequency trading, and whether HFT is good or bad. It’s not an important debate. HFT is neither good nor bad -- it’s merely a symptom of greater market issues that need to be addressed.

The issues we face as investors pertain to conflicts in our market structure. Rather than facilitators of capital movement, exchanges and many broker dark pools have become enablers of an HFT trading regime that favors one type of market participant at the expense of long-term investors.

Exchanges and dark pools deliver HFTs with built-in arbitrages, built-in trap doors, and built-in mines for those looking to make long-term investments. Poor disclosure practices serve to ensure unwanted touching and intermediation of orders investors place in stocks. Direct data feeds from the exchanges give traders not only a speed edge, which is one thing, but also an information edge, which is quite another. These are the real issues, and not whether some types of high frequency trading are good, bad, beneficial, or not.

The mainstream media, however, has focused on Vanguard’s opinion on HFT, PIMCO’s opinion, Schwab’s opinion, and Warren Buffet and Bill Gates’s opinions. And even whether regulators like it or not -- such as FINRA’s Chief of Enforcement David Bennett, who recently opined that HFT buying faster access was not a problem, and no different than someone choosing to buy a first-class airline ticket.

With regulators and law enforcement publicly examining the issue and sending out subpoenas, high-frequency trading firms postponing planned public offerings, and the public divided on the merits of HFT, it’s clear that the debate has become an emotional one. Which is why we are doing what we can to swing the debate back to the structural problems that underlie the HFT issues.

[To read more about the current market structure debate, read: The Great HFT Debate Is Yesterday's News.]

Many different parts of government are focused on market fairness -- and not just two regulatory bodies. Nobody wants any knee-jerk regulations to be proposed, molded, revised, lobby-ized, and finally implemented in a way that will only serve to worsen our fragmentation and complexity. We want to simplify the market, not make it more complex. Overregulation can have even more unintended consequences, and we desperately want to avoid that.

But at the same time we fear that the opportunity provided by the national exposure from Flash Boys will be wasted. Some simple, principle-based reforms would vastly improve the fairness of our markets, as well as the systematic risks we face as well.

Having met regulators at the Treasury, SEC, FINRA, and the CFTC, we know they are staffed with hard-working, well-meaning, and sharp-thinking public servants who are limited in budget, and who yet still truly want this debate sorted out intelligently for the real owners of the market -- investors. We need not distract them with straw-man arguments and business model beauty contests. The market will appropriately judge high frequency trading once certain conflicts, distortions and artificial incentives are removed from the market, just like it will render judgment on other types of market participation.

Let us not allow our eyes to be misdirected into focusing on the wrong card. Reforming some practices is long overdue, and will serve to bring down transaction costs, and allow us to focus on creating actual value by examining new ideas and companies to invest in, rather than devoting resources to constantly policing our orders as they’re whirled around a fragmented and conflicted mess. Reforming some practices will ensure that the connection between Wall Street and Main Street (job and wealth creation) is as direct and vital as possible.

Sal Arnuk is partner, co-founder and co-head of equity trading of Themis Trading LLC. Mr. Arnuk has extensive experience in equities trading and is an expert in electronic trading and market structure. He is also the co-author of Broken Markets -- How High Frequency Trading ... View Full Bio
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