Michael Lewis’s new book “Flash Boys” about high frequency trading whipped up emotions across Wall Street this week, but it has led retail brokers and regulators to take action.
Since the book was published on Monday, two brokers have announced they will route retail orders to IEX, the dark pool featured in “Flash Boy,” which provides a level playing field for all investors by slowing down orders
Today, TradeStation said it’s working with IEX to provide connectivity and access to the dark pool, which it called a “new and growing market center.”
TradeStation noted that IEX has been very vocal about its dedication to institutionalizing fairness in the markets. “At TradeStation we fully support innovation and technology that aim to evolve market structure and provide a level playing field for all,” stated the company.
In a statement, TradeStation said it was “troubled by recent reports in the media that high frequency traders are taking advantage of the information to which, legally or not, they have access and are using this information to gain an unfair advantage over retail and institutional investors and traders.” TradeStation provides an analysis and trading platform to active traders and certain institutional markets and operates a subsidiary TradeStation Securities, a registered broker-dealer.
On Thursday, According to CNBC, Interactive Brokers expects to make the new service available in the next 5 to 10 days. It will give investors the choice of allowing Interactive Brokers’ smart order router to decide which will decide which exchange to route the order to, or they could select to have the orders routed to IEX.
"Our view is that we're always happy to hook in any new exchange that's going to get our customers best-price execution," said Steve Sanders, EVP of marketing and product development of Interactive Brokers told CNBC. "We do wish them the best of luck and we hope that they do have something that will help, but we don't want to take sides. We let the objective facts decide,” Sanders told CNBC.
According to Reuters, the U.S. Department of Justice (DOJ) is investigating high frequency trading for possible violation of insider trading laws. This came during the same week that the FBI disclosed that it was looking into high-speed stock traders and whether they are front-running others trades by getting to exchanges’ faster, according to Reuters.
Earlier in the week, the Federal Bureau of Investigation had confirmed that it’s been conducting a “wide-ranging” investigation for months, as an outgrowth of its insider trading, eported Reuters. The bureau is reportedly examining a number of issues, including whether high -peed trading firms are spoofing trades to give the appearance of market activity.
Meanwhile, Charles Schwab, chairman of the retail brokerage firms, issued a statement that blasted high frequency trading and compared it to a growing cancer. “High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed."
Schwab went on to cite “Flash Boys” for shining the light on “systematic and institutionalized practices” such as “preferential data feeds and developing multiple order types designed for high frequency traders.”
However, Schwab, E*Trade, and others are reportedly among the retail brokers receiving payment for order flow, which is also one of the perverse incentives baked into the current market structure, critics say.
On Bloomberg Market Makers, Stephanie Ruhle, one of the anchors, pointed out that retail firms sell their order flow to the big banks – in return for payment for order flow- which in turn execute their trades through their internalization engines. Schwab is selling its orders to firms like Citadel, UBS and Citicorp, said Erik Schatzker, one of the program’s anchors. “Shouldn’t the firm disavow payment for order flow, before taking a stance against high frequency trading,” asked Schatzker, one of the firm’s anchors. Seth Merrin, CEO of Liquidnet, a critic of HFT, who operates wholesale electronic market for institutional trading, said that retail flow should be sent to the exchanges.
“I believe any time you sell order flow, you’re limiting the opportunity for those investors,” said Merrin. “We should have the exchange be the primary place for all retail trading,” said Merrin. While Liquidnet protects institutions trading blocks from being picked off by predatory HFT, Merrin explained that IEX operates in the current market structure, which he called "a leaky house."
With all the allegations flying about high frequency traders getting an unfair advantage with speed, retail brokers took steps to protect their customers and their reputations by adding IEX. 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