Germany Slows Down Traders

Posted by Jeff Carter
on September 26th, 2012

The German government is going to pass a bill that enforces a whole lot of rules on high speed traders. HFT has been debated recently in many government chambers. The US, France, and Great Britain have each taken up the debate on HFT. Each are constructing different solutions to the issue. While I view that debate as a positive occurrence because of the sunshine it begins to heap on the HFT/Exchange/Trading world, I don’t advocate for a lot of government action. Currently, none of the proposals on the table in any governmental body seem to make sense to alleviate the real problem underlying the market.

Governments will make rules that have effects in places they can’t envision. Also, rules are made to be broken or avoided and they probably won’t work in the long run. Technological advances might make them moot.

In addition, I am strongly against taxes or fees administered to HFT firms. That’s a fool’s way out. Taxes and additional fees are just another tax on productive capital. Like increasing capital gains, it will accomplish nothing. The only thing that will happen is the cost to access and use the market will go up, hurting smaller end users.

What governments and exchanges really need to do is work together to examine market structure. Speed is not the problem. Market structure is. Like bad doctors, they are curing symptoms, not the disease.

Allowing the existence of dark pools fragments marketplaces. Giving the wink to big banks and big hedge funds to trade against their clients order flow, or buying discount broker order flow and internalizing it is anti-competitive. Allowing certain firms to have an edge by getting data feeds sooner, co-locating and being ahead of the rest of the market is also anti-competitive. None of those issues are speed related.

As a matter of fact, going faster is actually better because it allows all information to be priced into the market faster. Speed with a perfectly level competitive playing field will cause markets to be even more efficient. Right now, they are tiered and disadvantageous to most of the market. They are designed for the sifted few. Because of the high start up costs, only the sifted few can afford to go faster. It’s a vicious cycle.

One of the great things about technological advances over the past thirty years has been the way it has put customers closer to suppliers. Huge swaths of distribution have been eliminated. Not so in the trading and investment world. Instead of becoming clearer, it’s more opaque.

Believe me when I tell you, if regulators would have let me stand on the top step of a trading pit, hold a customer order deck, and pay to trade against my customer orders I would have done it in a heartbeat. I wouldn’t be blogging here but relaxing in my beach chair on the island I owned. That’s exactly what they are allowing the big banks, hedge funds and HFT firms to do today. The volume and profit numbers show it.

follow me on Twitter
Like PnF on Facebook

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.