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Schwab calls on regulators to outlaw the "aggressive cancer" of high-frequency trading

04 April 2014  |  5178 views  |  4 Financial numbers

Wading into the raging debate about the impact of high-frequency trading on stock market investing, Charles Schwab has decried the practice as a "growing cancer" that needs to be excised.

In an op-ed piece credited to Charles Schwab's eponymous chairman and president and CEO Walt Bettinger, the pair claim high-frequency traders have "run amok" and are corrupting the capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for commodity and equities exchanges.

"High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets," they write. "It's a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk."

Schwab and Bettinger applaud the recent efforts of New York Attorney General Eric Schneiderman to"shine a light on unseemly practices in the market", and encourage the SEC to raise the urgency on the issue "to stop this infection in our capital markets".

They claim that high-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period.

"It's an explosion of head-fake ephemeral orders - not to lock in real trades, but to skim pennies off the public markets by the billions," say Schwab and Bettinger. "Trade orders from individual investors are now pawns in a bigger chess game."

Schwab and Bettinger outline a number of practices that they would like to see outlawed, including the preferential treatment of complex order types, unequal access to information, inapporporiate use of information to front-run large intitutional investors, and quote-stuffing, which adds to systems burdens and costs and distorts the market.

They urge the SEC, at a minimum, to establish cancellation fees to discourage the practice of quote stuffing.

"But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal," they conclude. "And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors. It is time to treat the cancer aggressively."

Comments: (4)

Neil Crammond - evoi - london | 04 April, 2014, 10:16

sadly traders like myself have been complaining of being "pick pocketed " for years ', yet have been ignored by exchanges and regulators alike .  Perhaps now we can name and shame the cheats ....some big names who are the thieves of trading .

A Finextra member | 04 April, 2014, 14:53

I fully agree with Neil. There are inequalities - if you can pay you can play - and a whole industry exists for that purpose (that is to continue to leapfrog to the front of the queue with technology). As far as the preferential treatment for these firms is concerned, simply pricing market access for super low latency access to the trading host at a premium, means that the individual trader will be late to the market - also always the case in the old open outcry markets - a membership (for a fee) put you in the pit (an advantage) - but today using the order structures or order types as a way of getting to the front is unacceptable - exchanges should step out of the trade 'direction' business (machines do that extremely well) and simply reduce acceptable order types to a limit or market buy or sell - period. Access should be the same for all members - part of the cost of doing business - no fast, super fast or ultra fast exchange revenue generators - this part should be up to network, technology and application providers who sell to the trading firms. There are also plenty of best execution rules to keep the brokers honest - but even the tools to track and log the quality of execution may be doubtful with the massive amount of data and the variation of network latency that can exist in the microseconds, never mind milliseconds that can make a difference. I think that exchanges (or any place that executes an order match) should be mandated to collect a fee per order (small, but related to the size of that order) that becomes an economic disincentive for skimming 100s, 1000s, or 10,000s of orders for a fraction of a penny/cent.

Real traders make markets that are tradeable under normal circumstances, not always good till near, or take positions in the market based on a real value judgement, not just on the back of someone else's order that can be front runned.

Is front running using a machine any better than insider trading? To me it is the same thing - creating a disadvantage to the investor, the investor's protfolio, stealing from the real speculator - we want them in markets also - and HFT as described here is 'high volume, low risk' trading that adds little value. A word in favour of technology - the trader can today, as long as his orders aren't being gamed, trade automatically, semi automatically (Neil probably uses a spreader tool) and on more markets with lower access costs than ever before - the HFT guys find it harder to compete in the cross market world - too many variables compared to the single market transaction (and not trade, for these aren't traders). But unchecked this unlevel playing field is of unparalleled proportion and can seriously damage the markets. 

Iosif Itkin - Exactpro Systems - Moscow | 07 April, 2014, 20:29

It is human nature to attribute success to self and failure to outside influences. When you make money as a day-trader, it is due to your knowledge, skill and intuition. When you can't make enough money, it is because of somebody or something. Can it be the evil HFT and the rigid market infrastructure?
There are different ways of making money. One can invest in technology and infrastructure to achieve competitive advantage. Others use human psychology and desire to find somebody to blame in order to promote their own high-frequency ticker plant or equity trading platform.

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 08 April, 2014, 14:32

One of my former employers used to position its technology as providing "unfair advantage" and splash this message in its ad campaigns. Will this line become illegal? Will we soon see storekeepers operating out of back alleys demanding that stores located on high streets be shut down?

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