Traders clashed over the fragmentation and ultra high speed of today's U.S. equities marketplace on Wednesday, as one charged that more traditional orders are being gamed but another said that high-frequency traders are unfairly vilified.
The trading experts -- summoned by the Securities and Exchange Commission to peel back layers of today's complicated, mostly electronic marketplace -- argued over what needs to be done to restore confidence after the Dow Jones industrial average mysteriously plunged some 700 points in minutes before sharply rebounding on the afternoon of May 6.
It shook confidence in our markets and it was avoidable, said Richard Rosenblatt, who has executed trades for institutional investors since the 1970s. The clear culprit was a commitment to high speeds whether it made sense or not.
He added, The flash crash was embarrassing.
The May 6 event confirmed some long-held concerns over the marketplace's stability.
The SEC and some policymakers are questioning the rise of high-frequency traders, which use lightning-quick algorithms to make markets and earn thin profits from tiny imbalances. Some critics have said they put long-term and retail investors at a permanent disadvantage.
The SEC is also probing the fairness and stability of a marketplace where some 50 electronic trading venues compete for ever faster and heavier order flow.
Today it is very difficult to say that there are not subsegments of this market that are taking advantage of us. They use strategies that are trying to game what we're doing, said Kevin Cronin, director of equity trading at Invesco, an asset management firm.
Market makers and high-frequency traders took exception to accusations that they trade with no regard to companies' fundamentals.
Lime Brokerage President Jeffrey Wecker said high-frequency traders are subject to misplaced vilification.
The chief executive of Getco LLC said his firm -- a global leader in algorithmic trading -- had little to no effect on the long-term price of a publicly traded company. Getco is in the practice of trying to find the best price equilibrium, Stephen Schuler said.
Regulators and major exchange operators have yet to pinpoint the cause of the May 6 flash crash and are working on implementing single-stock circuit-breakers, or pauses in trading, if a stock is in free-fall. Nasdaq unveiled a single-stock circuit breaker on Wednesday.
The SEC roundtable, conceived earlier this year before the flash crash gave it added urgency, comes as the regulator digests more than 200 letters in response to its wide-ranging paper on trading and market structure.
The concept release, which asked several questions about high-frequency trading, was published in January in response to concerns building through 2009 over the fairness and stability of U.S. equity markets.
Diamond Hill Investments Director Stephen Sachs said competition is good, but we have clearly reached a point where this fragmentation is creating significant issues.
We have created an environment that is far more difficult to navigate, he said.
Others defended the high-speed marketplace that has made trading easier for many.
Gus Sauter, chief investment officer of fund giant Vanguard Group, told the SEC that high-frequency traders reduced trading costs for investors over the past few years and now help to knit the very fragmented marketplace together.
Other changes could come, such as saddling high-frequency traders with commitments to trade and cracking down on anonymous trading venues known as dark pools.
We need to work on incentivizing firms to really step up and commit capital over a duration, and the only way to do that is really through credits and incentives, Christopher Nagy, head of order routing at online broker TD Ameritrade Holding Corp, told the panel.
SEC Commissioner Luis Aguilar raised concerns that the bulk of roundtable participants were from the financial services industry.
A series of regulatory changes over the last decade contributed to the proliferation of alternative, non-exchange trading venues in the United States, as well as the reliance on computerized high-frequency trading to ensure that there is enough liquidity to keep markets flowing.
(Reporting by Jonathan Spicer and Rachelle Younglai; Editing by Tim Dobbyn, Robert MacMillan, Gary Hill)