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High Frequency Debate Influences Survey on Stock Market Fairness

A survey conducted by ConvergEx Group found that 70% of participants believe the US equity market isn't fair to all participants.

The intense debate over high-frequency trading spurred by a best selling book and regulatory investigations has begun to affect the sentiment of institutional investors as a new poll demonstrates.

Over two-thirds, 70 percent, of financial services participants believe that U.S. equity markets are unfair and that HFT is harmful, according to a survey conducted by ConvergEx Group LLC, the global agency broker, released yesterday.

Only 18% of the participants said that U.S. equity markets were fair, while 11% indicated they didn’t know. The results reflect the negative way in which Wall Street has been portrayed in Michael Lewis’ book “Flash Boys,” published on March 31, which contends that high-frequency traders are scalping institutional orders through tactics such as latency arbitrage and access to proprietary data feeds and colocation services to get an unfair advantage over other investors. An investigation by Attorney General Eric Schneiderman into HFT firms also ignited concerns, while the SEC Chairman White has said that HFT is a primary focus as well.

The ConvergEx survey is based on 357 respondents, of which 233 work on the buy-side including mutual funds and hedge funds, 73 work at sell-side firms or banks and four who are at exchange operators. ConvergEx conducted the survey from April 16 to 21, and has a margin of error of plus or minus 10 points.

ConvergEx’s customers are primarily large institutional investors who represent pension funds and mutual funds. More than half of the participants, 51%, said HFT was either harmful or very harmful to U.S. equity markets.

“What may be surprising, however, is that most people seem to be taking a wait-and-see posture,” commented Eric Noll, president and CEO of ConvergEx Groups, in a letter introducing the survey. “Very few respondents to our survey have made any changes recently to the way they interact with the markets and the majority feel that regulatory changes can provide answers.”

Despite the negative sentiment, the survey revealed that two thirds or 71% of participants have not made any changes to the way they interact with the U.S. equity markets. Twenty percent said they made slight changes, while only 2% said they made significant changes.

In total, 43% of the participants are looking to more regulation for the U.S. equity markets to resolve any flaws in the market structure. Less than 40 % said there should be the same amount of regulation, while 19% would like to see less regulation.

ConvergEx’s Noll told Bloomberg News that its buy side customers view make-or taker pricing as a “flawed incentive system,” suggesting this is one of the key areas that needs to be addressed.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
5/20/2014 | 10:22:52 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
Interesting question. If someone is happy with the prices they are getting, and don't mind possibly losing a few pennies (or dollars) here or there, then HFT isn't that bad.

But as funds get larger, i guess, the pennies and dollars start adding up. What is acceptable, and what is frontrunning depends on the investor, it seems.
IvySchmerken
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IvySchmerken,
User Rank: Author
4/30/2014 | 2:12:07 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
Thank you for weighing in on this topic, particularly since you are a '40 act Fund manager." Those who see the value in HFT say that you are getting tighter spreads, lower trading costs and more volume. The arbitrage is supposed to keep prices in balance. I am not sure whether the prices are better. Then again, I'm not qualified to say. But since HFT revenues have declined dramatically, there is less to extract.
SeeYouSoyuz
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SeeYouSoyuz,
User Rank: Apprentice
4/29/2014 | 11:23:28 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
HFT is a fascinating subject because we are both at the frontier of free trading and the observation that in this "free zone" there are many who seem to be trolling profitably on what little is left between spreads.

The key question to me as a '40 Act Fund manager is this. Do we believe that we are getting better prices in exchange for someone else (the HFTs) getting best prices?
IvySchmerken
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IvySchmerken,
User Rank: Author
4/28/2014 | 3:12:40 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
The Michael Lewis book has whipped up a frenzy with its contention that the stock market is "rigged." Many experts have spoken out to explain the evolution of market structure and HFT as a response to SEC regulations, specifically Reg ATS which led to the creation of many dark pools, and Reg NMS (2007) which requires firms to protect the best price in the market. People who understand the HFT strategies have spoken out and written papers. A lot of the clamor has to do with tactics like "queue jumping" and spoofing and allegations of front running with faster data feeds.. The problem is no one has been able to distinguish between what is real liquidity provided by HFT strategies and what is the phantom or fake noise of rapid fire trading. Until there is some fact-based analysis by regulators and industry leaders, the debate will continue to be polarizing.
Becca L
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Becca L,
User Rank: Author
4/27/2014 | 8:11:36 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
Too true. And as the book also highlighted, anyone with a clue as to what is really going on is keeping their mouth shut. It will be interesting to see if the emotional public debate has any real impact on regulation (I guess that it will not).
Nathan Golia
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Nathan Golia,
User Rank: Author
4/27/2014 | 7:52:59 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
Unfortunately, I'm sure it's quickly becoming another polarizing issue, with any conclusions about its impact interpreted by readers in accordance with their own personal feelings about the market.
Becca L
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Becca L,
User Rank: Author
4/25/2014 | 10:55:27 PM
re: High Frequency Debate Influences Survey on Stock Market Fairness
Really interesting! If the current HFT debate is anything to go by, the 11% that indicated they didnGÇÖt know if HFT was harmful/fair are the ones with the best perspective. Lewis brought the issue back into the spotlight, but is anyone really much closer to concluding its impact on the markets?
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