Principal's McCaughan: "We Want To Be Able To Look Our Investors In The Eye And Tell Them The Market Is Fair" And Now That's Impossible
Some self-proclaimed pundits have repeatedly, and falsely, stated such a thing as cross-market arbitrage is impossible. They are of course, entitled to their opinions. In the meantime, here is Principal Capital's Jim McCaughan explaining in simple terms how cross-market arbitrage is not only possible, but happens constantly, and can serve as the basis of frontrunning by the HFT crew (the same group of "liquidity providers" that is now being investigated by FINRA for market abuse... presumably for a reason).
Some of the key quotes:
- Order to one trading venue get shared with others. The problem is there is very strong circumstantial evidence that it's front run in many places. And that is why both the SEC and Finra have been looking at who is doing the trading in order to get more forensic about trading patterns.
- I am talking when oreds get pinged out to multiple trading venues, there is at least circumstancial evidence that there's quite widespread use of that information to front-run trades... That's fraud.
- You have to be very careful about your trading metrics. We are combating issues in the market microstructure. These issues are making the market more volatile than it needs to be.
- There are traders who send out orders with no intention of filling them, simply to try and see what activity it provokes.
- It is getting to the point that the investors are put off by the volatility that these phenomena are causing, and that is actually quite dangerous. We want to be able to look our investors in the eye and tell them the market is fair, and unfortunately in the market it's quite difficult to do that.
The relevant section begins at 6:30 minutes into the clip.