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Summary

  • Milken Institute panel on trading, Speed to Market: The Evolution of Trading.
  • The Individual investor has it better than ever.
  • There are still questions about high frequency trading.

The Milken Institute hosted its 17th Annual Global Conference and several panel discussions that readers of Seeking Alpha will find very interesting. With Michael Lewis' new book Flash Boys, small investors are wondering if the markets are rigged. This article seeks to answer many of those questions.

The panel was entitled Speed to Market: The Evolution of Trading. It was moderated by Chris Brummer, Professor of Law at Georgetown University. Panelists included: Seth Merrin (CEO of Liquidnet), Jamil Nazarali (Senior Managing Director of Citadel), Joe Ratterman (CEO of BATS), Fred Tomczyk (CEO of TD Ameritrade (NYSE:TD)), and Greg Tusar (Co-Head of Global Execuation at Knight Capital Group (NYSE:KCG)).

Some interesting facts include:

  • Round trip data speed from New York to Chicago travels at the speed of light.
  • High Frequency Trades accounted for 21% of the market in 2005 and 51% in 2013.
  • Off-exchange trades accounted for 15% of trades in 2008 and 35% in 2013.
  • Bid-ask spreads on bonds are at historic lows.

The first question was in regards to how individual investors are fairing. Fred Tomczyk replied that the small investor has never had it better. In the last ten years, the average trade has come down from $52 to $12, bid/ask spread from 12¢ to 6¢, and execution from 10 seconds to less than one second. He also said that TD Ameritrade has only gotten 70 phone calls and 120 emails in regards to Lewis' new book.

Joe Ratterman pointed out that there are 13 exchanges (soon to be 12) run by five operators. Of all trades, 31% of volume is by market makers, 30% by bulge bracket firms like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), 15% by second-tier firms, and 10% proprietary trading. The individual investor has never had it better in regards to trading. Things are better, faster, and cheaper.

Seth Merrin took a different view than many of the other panelists. His firm, Liquidnet Holdings, matches buy-side institutional trades. So if a pension or mutual fund wants to trade 1 million shares, they are better to find another institution. He also pointed out that the markets are inverse economies: the bigger the trade, the worse the deal. Smaller investors can get better price execution for smaller trades as they do not move the market. The money that pensions and funds save in trades accretes to the small investor as they are the ultimate beneficiaries.

Merrin also stated that not all high frequency trading is good and not all bad. Some do take advantage of supply/demand and make money off of this phenomenon. In a survey, 70% of buy-side funds are "weary" of high frequency trading. There is an "arms race" to make algorithms that will outsmart the buy siders. A great article on Seeking Alpha that explains HFT can be found here.

He was critical of the SEC and said that they should do more to mitigate risk. Many laws were written before computers. Ratterman disagreed and said that Mary Jo White is doing a great job running the agency.

Greg Tusar feels that competition and choice of market maker is more important than speed and order flow. Price information is real-time, all news is instantaneously factored in. The challenge for institutional investors is to not move the market.

It seemed that everyone was in agreement that the individual investor has it better than at any time in the past. Many of the panelists represented market makers, exchanges, and traders so it was titled. The only person who really seemed to represent the buyer was Seth Merrin, and his buyers are institutional. Though markets are certainly more efficient, it comes down to fairness-can one party trade on information about another party's trade?

Source: Milken Institute Panel: The Evolution Of Trading And Its Effect On Individual Investors