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Leibowitz: Finding New Ways to Police an Automated Market (HFT related)
Started:December 29th, 2011 (11:04 AM) by kbit Views / Replies:559 / 0
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Leibowitz: Finding New Ways to Police an Automated Market (HFT related)

Old December 29th, 2011, 11:04 AM   #1 (permalink)
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Leibowitz: Finding New Ways to Police an Automated Market (HFT related)

No one wants to play a rigged game unless they're in Las Vegas and getting complimentary drinks. Wall Street has convinced the world it's a scam and investors have responded with their feet, particularly in the mutual fund industry where December will mark the 8th straight month of net withdrawals.

Along with a sense of economic progress only restoring belief in a level playing field is going to bring money back into stocks. According to Larry Leibowitz, the COO of NYSE Euronext, his challenge is two-fold: he needs to create and ensure a fair marketplace then prove he's done so to the satisfaction of a deeply suspicious public. No substance. No empty gestures and faux crackdowns while the investing public is fleeced. Real, verifiable, change.

Catching the offenders from the most recent scandals is necessary but not sufficient. That's just the Department of Justice doing its job. Slowly. No one, including market regulators when they're honest, thinks justice will ever be truly served for the sins of the financial crisis. The wheels of justice need to keep grinding, hard, but it's way too late to trick anyone into thinking Big Money paid a real price for the havoc they wrought. Leibowitz can't fix the past but he can rebuild the system currently in place.

In the here and now the most suspicious and mysterious Wall Street investment strategies are those of the High Frequency Traders or HFT's. The HFT game is all about machines and speed with funds using algorithms and computerized trade executions to bet on the next few cent move in more or less any publicly traded stock. Get in, make a couple pennies, get out. If you can pull that off a few million times a day it adds up to real money.

Things get ugly when these HFT's, which some say account for as much 70% of trading volume, all start to make the same bet. Such was the case on May 6, 2010 when the SEC says a mutual fund inadvertently dumped the equivalent of $4.1b into the market at once. Every HFT on earth started dumping equities triggering a 9% crash that reversed itself within minutes.

Leibowitz says the flash-crash nightmare obscures the value derived from the liquidity provided by programmed trading on a day-to-day basis. Among other benefits, the volumes have forced spreads tighter and had much to do with disappearance of the huge commissions paid during the days of market makers.

None of which suggests Leibowitz doesn't see the rise of the computers as a threat. The SEC is "taking a long look" at the situation and the NYSE itself is constantly updating networks and hardware of its own to better identify suspect trades and patterns.

"We need to prove that when bad guys do bad things they get caught," says Leibowitz. He's willing to do what it takes, including working with former enemies. He wants "staffing and regulation with people that understand the market, who have maybe even done some of those (illegal) things," then give this upgraded team the tools they need to win.

Think of it as the Untouchables with a few bootleggers on the team. It's a page out of the playbook of FDR who famously named market manipulator (and bootlegger) Joe Kennedy the inaugural head of the SEC. Kennedy knew the tricks and, to the shock of many, actually closed many of the loopholes he had helped invent.

Leibowitz understands restoring trust is going to require huge amounts of money, time and fresh thinking. Faking it and cronyism are already assumed by the public; the burden is on Leibowitz and the NYSE to prove that perception is no longer reality.

( There is a video in the link )
NYSE COO Larry Leibowitz: Finding New Ways to Police an Automated Market | Breakout - Yahoo! Finance

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