Schwab calls on regulators to outlaw the "aggressive cancer" of high-frequency trading
04 April 2014 | 6807 views | 4
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."