Larry Tabb Confirms Exchange-Based Frontrunning Is The Norm

Tyler Durden's picture

A funny exchange between a rather conflicted Larry Tabb of Tabb Group and AFL-CIO's Brandon Rees deserves a watch, as it highlights the latest fault lines in the market structure debate: watch for exchanges to increasingly blame dark pools, and vice versa, even as both do nothing but add to systemic market collapse risks in exchange for a marginal reduction in trading costs. Whether the trade-off of imminent market crashes at any moment courtesy of a market structure that nobody can make sense of any longer in exchange for a few cents per thousand shares is equitable is up to others to decide. It is certainly something that the industry will defend until its last drop of blood, although expect the SEC and the government to finally step in to curb the rampant abuse of front-running "privileges" by exchanges and secrecy and rent internalization by banks through dark pools.

In the clip below the AFL-CIO once again discloses its intent on bringing back a Tobin Tax by taxing HFT, a proposal we (well, not Marla) have long endorsed, as it will finally return some semblance of "investing" to a market that is nothing more than a speculative vehicle for churning stocks on steroids, in which collecting liquitiy rebates is the primary goal of 80% of market participants, without regard . If in the process of curbing HFT, liquidity has to go down and trading costs have to go up, so be it. Markets worked for centuries without causing the end of Western civilization, they will work again. At least the risk of instant market meltdowns will be fully eliminated.

The funniest bit of the exchange occurs at 3:35 into the clip, when Tabb publicly discloses that front-running is not only legal but occurs all the time on open exchanges. When Erin Burnett, who unfortunately still thinks that the Deutsche Mark is used in Germany, asks who is doing the front running, Tabb says "It could be anyone." And as retail investors tend to not have access to dark pools (in fact Reg ATS allows banks to singlehandedly determine who is allowed access to their dark pools without any appeal recourse),  now you know that every single time you put in an order, it is by definition frontran by everyone who has a million dollar collocated trading station: thank you Mr. Tabb for once again proving our breathless rantings. Which brings us to our question from early 2009 - when will the SEC finally look into this broken, criminal and endlessly front-running market?