My focus on various topics in the realm of program trading and market liquidity has engendered quite a few vitriolic responses, some of which have argued bitterly that Zero Hedge is on the wrong path in describing the somewhat vampiric qualities of liquidity extraction by recent artificial constructs, most notably those undertaken by the NYSE. I present to our readers an original paper by two BNY ConvergEx managing directors from 2007 which should provide some additional datapoints in the great debate on whether or not liquidity benefits at all from the recent domination of computers in the open market, and touches on other such highly contested issues as dark pool and dark liquidity value and execution.

I want to bring our readers' attention particularly to Exhibit 4 which indicates that from a liquidity standpoint, intra-day prop trading is the worst (Goldman Sachs domination anyone?) followed by black box algo and automated market making.


In essence these observations dovetail with the findings in a recent guest post by Joe Saluzzi.

I would also like to bring attention to the finding on page 27, according to which intra-day prop trading and black box trading is low quality because both compete with long and intermediate term traders for the best price. From the portfolio manager's and trader's perspective, these are sources of low-quality liquidity that can be viewed as competition for buying or selling a stock at the best price. Maybe in this more theoretical light, it is useful to again readdress the very pertinent complaint that the NASDAQ launched against the NYSE SLP program which has as of yet still generated no response either by the exchange or by the Securities and Exchange Commission.

BNY Beyond Execution 2007 Fall