Arthur Levitt, former chairman of the SEC, writes an Op-Ed in the WSJ on HFT, titled "Don't set speed limits on trading" providing the usual justification for the phenomenon, claiming it "contributes significantly to market liquidity, a critical measure of market health and something all investors value."
Alas, this is at the very essence of the debate: while liquidity may be incremental, the question is just how critical is it in light of the creeping slippage costs associated with the monopolization of liquidity provisioning by a select few. The "toll" collected by the few HFT vendors out there has been shown to be a substantial number: is it any surprise that Mr. Levitt vocal defense of an increasingly more spotlighted HFT comes at a time when he as advisor not only to HFT provider Getco but also to primary NYSE PT monopolist Goldman Sachs. Granted, Mr. Levitt does not disclose these conflicts of interest in his piece - perhaps the information would be seen in a slightly different light were that to be the case. Levitt claims the following:
But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It's fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.
High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.
Indeed, Mr. Levitt is happy to point out the evolutionary aspect of HFT which we do not disagree with, however the fundamental question is whether the extensive stock churn that is controlled by a select few who have the means for a positive IRR on such an investment to take advantage of the windfalls, is merited especially in light of the oligopolistic nature of the HFT landscape. One needs merely to look at how promptly the Misha Malyshev led Teza was ejected from the ranks of the HFT players after what will soon evolve to be a fabricated scandal using Sergey Aleynikov as its primary pawn.
Another point Mr. Levitt brings up:
Others simply assert that all high-frequency trading has no moral or underlying economic value, and that high-frequency trading is simply a game for those who want to profit from getting access to data a split-second ahead of someone else. The Securities and Exchange Commission should ignore these complaints and the caricature that has developed of high-frequency traders.
If the SEC had ignored complaints about Flash trading, no doubt Mr. Levitt would characterize these as a caricature of trading protocols as well (or maybe not, as Direct Edge competes directly with the monopoly of the GS-NYSE complex in HFT, in which the former SEC chairman has a vested interest).
However, Mr. Levitt's conclusion is troubling:
We should not set a speed limit to slow everyone down to the pace set by those unwilling or unable to compete at the highest levels of market activity. Investors large and small have always been served well by those looking to build the deepest possible pool of potential buyers and sellers, make trades at a better price, and all as quickly as possible.
Keyword here being "unable to compete" - just how does that tie in with Mr. Levitt's thesis that all of this is merely a service for the common good, oddly in light with Goldman's recently amended mission statement.
Furthermore, where is the defense of dark liquidity and actionable IOIs - two key concepts that serve at the nexus of visible HFT and the activities (unknown to the majority of market participants) that occur below the surface? Levitt can not defend one without touching on these other major issues, yet he conveniently chooses to ignore their implications.
Lastly, as expected, nowhere in his fluff piece does Mr. Levitt acknowledge or discuss any of the risks associated with HFT: for a good primer on that, we would refer Arthur to a piece written less than a month ago by one Paul Wilmott, a name that has much more practical and vested authority on the matter than a conflicted bureaucrat who is obviously merely pushing the "party line" of his two primary advisory clients.