We were pleasantly surprised yesterday when we saw news that Chuck Schumer was starting a campaign to aggressively rein in the HFT market members (which he correctly categorized as responsible for excessive volatility and the flash crash). Some reading between the lines, however, makes it appear that this action could be nothing but a red herring distraction, which attempts to actually promote the interests of the very same HFT lobby which the senator is presumably attempting to control.
Here is how the press release was titled: “SCHUMER TO SEC: IMPOSE TOUGHER RULES ON HIGH- FREQUENCY TRADERS TO CURB STOCK PRICE VOLATILITY AND PREVENT ANOTHER FLASH CRASH” http://schumer.senate.gov/record.cfm?id=327160& We hadn’t seen much from Sen. Schumer on the high frequency trading debate since last summer when he proposed banning flash orders (which by the way still exist). So, we were pleasantly surprised to see Sen. Schumer jumping back into the fight…or so we thought.
Once we started reading Sen. Schumers letter, it started to feel like we had read this before. Sen. Schumer believes that any market participant making markets in 25 or more symbols should be subject to market maker obligations. He suggests 4 areas that the SEC should focus on:
1-Best price obligation – require market makers on the NBBO for a certain percentage of time
2 -Maximum quoted spread – quotes should be within the triggers of circuit breakers and stub quotes should be eliminated.
3- Depth obligation – require market makers to place orders below the NBBO
4 – Uniformity across trading venues – market maker obligations should be consistent across all exchanges and market centers.
Hmmmm, now where did we read this before? Oh thats right, on July 9th, three large high frequency trading participants (GETCO, Virtu and Knight) sent a letter to the SEC which was almost exactly the same as the Schumer letter (http://sec.gov/comments/s7-02-10/s70210-255.pdf). In their letter, they also call for a set of market maker obligations. They propose amongst other things a Best Price Obligation, a Maximum Quoted Spread and a Depth Obligation.
Sen Schumer though goes one step further in his letter. He says that since his proposed ”obligations are burdensome and making markets is voluntary, the Commission should consider appropriate incentives for high frequency traders to become market makers.”
What a disappointment. We thought that Sen. Schumer was going to try to help fix our fragmented market structure. But he appears just to be asking for more incentives for HFT. We guess that access to direct data feeds, access to data centers where they can co-locate their computers, liquidity rebates and a share of market data revenue are not enough incentives for Sen. Schumer and his HFT friends.