Five years ago, we were the first to bring the world's attention to the staggering profitability of several firms that engaged in 'high frequency' trading that presented themselves as 'liquidity providers' and suggested (in our ever so humble way) that mark liquidity was in fact shrinking and this could lead to a 'black swan of black swans' long before the flash crash was even dreamed of. Fast forwarding to today, after hundreds of articles, not only is the mainstream "getting it" but such behemoths as Cliff Asness - who happens to run one of the world's biggest quant funds - are forced to pen a WSJ op-ed to explain it's all a fallacy and blame a lowly blogger (or digital dickweed) for starting all this naysaying five years ago.
Asness explains in the WSJ Op-Ed...
A few nights ago, CBS's "60 Minutes" provided a forum for author Michael Lewis to announce that Wall Street is "rigged" and for the sponsors of a new trading venue called IEX to promise to unrig it. The focus of the TV segment was high-frequency trading, or HFT, an innovation now over 20 years old.
The stock market isn't rigged and IEX hasn't yet generated a lot of interest. In our profession, what we saw on "60 Minutes" is called "talking your book"—in Mr. Lewis's case, literally.
Forgive us for a moment as we note, in passing, that for someone to accuse a person of talking their book, when that someone has a more than vested interest in computerized, "quant" trading whose success is a function of its secret sauce remaining forever in the dark (Mr. Asness may deny running a HFT shop but there is of course no way to verify this externally) and where the lines between one HFT strategy and another is a very thin if lucrative one, is somewhat hypocritical.
But Asness puts the blame for this tornado of trading tumult squarely at the feet of...
The onslaught against high-frequency trading seems to have started about five years ago when a blogger made a wildly exaggerated claim about one firm's HFT profits.
So there it is, thanks to a blogger (Zero Hedge) five years ago, the reality of the US equity market's 'rigged' nature has been dragged kicking-and-screaming into Joe "I'm long TWTR" Sixpack's living room by Michael Lewis, Brad Katsuyama, Nanex, Themis and a host of other reality-seekers.
Of course, we'll give the last word to Mr. Asness:
Our bet is that high-frequency trading comes out on top as it offers more investors better execution. But we have zero problem being proven wrong by the marketplace.
How HFT has changed the allocation of the pie between various market professionals is hard to say. But there has been one unambiguous winner, the retail investors who trade for themselves. Their small orders are a perfect match for today's narrow bid-offer spread, small average-trade-size market. For the first time in history, Main Street might have it rigged against Wall Street.