Remember when the always entertaining HFT lobby decided to spin Michael Lewis' Flash Boys by saying that the HFT parasites may frontrun orders and may make a mockery of efficient, non-tiered markets, but they only do so for "slow money", vanilla funds (who can afford to pay HFT "tolls") and generally don't impact mom and pop retail investors (as if retail investors still exist, and as if it isn't mom and pop's money keeping mutual funds in business) which somehow was supposed to absolve them of years of post-Reg NMA rigging and manipulation.
Yet despite its inherent stupidity, this "justification" did bring up a valid point: if mutual funds are indeed impaired thanks to slippage costs in the ~1% per trade ballpark, leading to billions in annual "tolls" paid to HFT algos just because they exist, frontrun and sub-penny every order, then why don't these same vanilla funds launch their own trading venue allowing them to trade away from the predatory algo plague?
Surely, if HFTs are so bad, then the vanilla funds will finally realize that "enough is enough" and take their precious orderflow away from public exchanges, right?
Yes, and yet for years the big money managers stoically took it on the chin, and whether out of lazyness or some other unexplained motive, allowed their orders to continue being HFT-frontrun on public exchanges and 3rd party dark pools year after year, making VWAP and TWAP orders a cost center, boosting the case that HFTs aren't really bad for stocks.
According to the WSJ [10], some of America's largest mutual funds and asset managers led by Fidelity Investments "are close to launching a private trading venue designed to let them buy and sell large blocks of stock without the involvement of Wall Street firms and high-speed traders, according to people familiar with the matter."
The new venture is the who's who of traditional asset management in the US and includes nine firms, including BlackRock Inc., Bank of New York Mellon Corp. , J.P. Morgan Chase & Co. and T. Rowe Price Group Inc., who are saying goodbye to "lit" markets, i.e. public exchanges, "and forming a company that will operate a "dark pool”—a private trading venue that offers investors a degree of anonymity—the people said."
Who will own the new venue:
Now the partnership between the companies has formalized, with Fidelity taking the largest ownership position in the new company and other fund firms holding smaller stakes, these people said. The company is expected to launch in the coming days, and trading will begin later this year. The companies each will have representatives on the board and will work together on decision-making, these people said.
The company that will host the trading venue is now called Luminex Trading & Analytics, which was approved as a broker-dealer by the Financial Industry Regulatory Authority on Dec. 26, according to public documents. Michael Cashel, a senior vice president at Fidelity, will be Luminex’s interim chief executive, these people said.
This is both good and bad news. It is good, because it formally marks the beginning of the end of HFT (even if it means that Brad Katsuyama's IEX exchange as a "fair" provider of an HFT-free market is now essentially dead).
"The effort is unusual for the fund companies because they are rivals, and typically use similar trading venues at big banks, or public exchanges. They have banded together recently out of a shared desire to cut costs and weed out high-frequency traders, who often have an unfair advantage according to critics. The companies also have had trouble buying and selling large orders of stock in other pools, these people said. The new venue will require all trades have a minimum share amount.
It's bad news because as a result of the terminal failure of corrupt regulators to do their job and regulate public markets - a sad fact which is now confirmed as a result of this proactive step by money managers to simply skip markets altogether and start their own private venue - price discovery for what little is left of retail traders, is now dead, as the market making blocks will execute in dark venues on prearranged prices which will only hit the CQS after the fact, and essentially establish not only a two-tier, but a multi-tier market, in which having access to the most up to date price information will be determined by how much one is willing to pay.
That said, even as broken as it currently is, the market is still a self-regulating ecosystem, and it was only a matter of time before the scourge that is HFT is not only exposed for everyone, but ultimately wiped out. Which is why the good vastly outweighs the bad.
The only problem is that with HFT soon to be shunned from equity markets everywhere, in its deathly throes it will focus almost exclusively on the one market where there is still some volume (thanks to central banks) and volatility: FX. And we for one can't wait to see the look on Abe and Kuroda's faces when, in a few milliseconds, the USDJPY trades down from 120 to 0.001 simply thanks to a fat algo finger.
