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IEX’s Katsuyama: Market Structure Problems Are Everyone’s Responsibility
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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
6/10/2014 | 1:30:50 PM
Re: Strong words
Agreed. The situation is different than the market makers vs day traders from years ago. Today's technology does allow for false, or fake, order books, that allow certain firms to exploit orders.

What will be done, or what can be done, remains to be seen, however.
tomrbusdev
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tomrbusdev,
User Rank: Apprentice
6/4/2014 | 7:27:59 PM
Re: Strong words
Brad seems to be zeroing in on the methodology of manipulating the order book by allowing cancelations simultaneously with an order. So he says that the dark pools and internalized orders have an advantage because they can post an order and then cancel it when an offer comes in but beofre the offer executes. That's the 350 ms gap.

The whole issue is really no different than the fat spreads that used to be the OTC market now NASDAQ. Along came the daytraders like Harvey Houtkin with faster execution on an ATS that allowed them to pick off orders in between the bid and offer. In those days, folks like Madoff, Herzog, Fidelity, GS, Lehman.... were running market maker books with spreads of 1/4 to a half in cases. The market makers, NASDAQ brokers of the day were crazy up the walls about campaigning that the day traders were ruining the business and should be banned from participating in the OTC market. 

Today, it's a little different because the HFT firms are exploiting a subtle difference between the rules of operation for certain institutions using dark pools for example and the individual investor. First there is the ability to cancel more rapidly, therefore creating what Brad says is an artificial book. Secondly, they have the ability to enter orders on both sides of the book using a 350 ms programmed simultaneous order to call and put and cancel in two different accounts for the same options contract.  This allows them to create an artifical book, and also to act upon new orders against that artifical book with a 350ms edge. I think this is what Brad is saying.

Hi Ivy
IvySchmerken
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IvySchmerken,
User Rank: Author
5/23/2014 | 6:01:09 PM
Re: Strong words
Just because certain practices are legal, doesn't make them right, would be the message that Brad Katsuyama expressed in the interview. He is looking out for what's best for the market - investors that want to own a stock as opposed to firms that are using technology to earn rebates scalp investors. He believes there is a legitimate arbitrage activity for high speed traders, in ETFs versus the underlying constituents of a basket and in interlisted stocks. But he's not too crazy about the intricate order types that have been created by exchanges for HFT to comply with Reg NMS and earn a rebate, since certain order types allow them to trade ahead of an institution who is willing to buy stock at the same price.
Becca L
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Becca L,
User Rank: Author
5/23/2014 | 1:50:06 PM
Re: Strong words
From my view, Katsuyama is arguing for a market that follows the spirit of the law rather than the letter of the law. His overview of the situation is rather blunt - traders will toe the line when it's most convenient, but making it the normal behavior rather than an exception is rather disappointing, and too great a strain on average investors.
IvySchmerken
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IvySchmerken,
User Rank: Author
5/22/2014 | 5:32:18 PM
Re: Strong words
Disclosure and more transparency are steps the industry can take. Exchanges could simplify order types or eliminate those that are clearly meant for HFT to earn rebates. Some dark pools (ITG, IEX) have begun to post their ATS forms on their web sites, providing information on their trading rules and order types. Brokers could explain their order routing practices to the buy side. Liquidnet is going further by creating transparency controls, letting members opt-in/or opt-out of certain liquidity.

This is not really reforming the market, but sharing information that's been opaque or hidden.

To reform the bigger structural issues, like maker-taker system or locked/crossed markets which are banned by Reg NMS, it would seem that government (SEC) intervention is necessary.
Nathan Golia
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Nathan Golia,
User Rank: Author
5/22/2014 | 4:34:09 PM
Re: Strong words
Probably true, but if everyone has a role, certainly HFT is a component. Pointing fingers everywhere is still pointing fingers. Can the industry look beyond short-term myopia to drive needed reforms without government intervention?
IvySchmerken
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IvySchmerken,
User Rank: Author
5/22/2014 | 3:11:17 PM
Re: Strong words
Yes, these are strong words. I think he is saying that everyone who has done convoluted things to maximize rebates is part of the problem.

In reality, all of this is legal, under the current market structure.  By saying that everyone is complicit in corrupting the market structure, he's shifting the focus away from HFT and putting the onus on the overall industry to move forward with improvements rather than wallow in inertia.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
5/22/2014 | 2:30:05 PM
Strong words
That is a pretty strong statement from Katsuyama. Does this fall under "aiding and abetting?"


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