The May 6 Flash Crash has sent the Investment Company Institute into action. The Washington trade association wants a better handle on high-frequency trading and dark pools. Not only is the ICI asking this clandestine corner of the market for more information, but it’s urging the Securities and Exchange Commission to look closer, too.

While noting that the mutual fund industry, which buys stocks in large share lots, is not "anti-high frequency trading," the association's counsel said practitioners of algorithmic trades with frequent cancellations need to provide better details to institutional investors and to the SEC.

“Explain to us what you’re doing,” contends Ari Burstein, ICI senior counsel securities regulation, in the capital markets group. "Then we'll understand more."

Fleeting Liquidity

Burstein acknowledges that high-frequency trading provides much-needed liquidity to increasingly electronic markets. Where mutual funds have concerns, he said, is whether the liquidity is fleeting and, when it’s available, whether it’s only being directed at large-cap stocks, such as Citigroup Inc. [C].

Institutional investors want "deep and liquid markets" in all kinds of stocks, including micro-cap and emerging-markets stocks, for which "getting a big order through" has become difficult.

He and Kevin Cronin, chairman of the ICI's Equity Markets Advisory Committee, also contend that the high probability that fast traders will cancel their orders, "creates a lot of noise for the buy side.” By some estimates, Burstein said, 90%+ of high-frequency traders' orders get cancelled, as they search for minute margins within milliseconds.

"This is not doing much for the institutional investor,” he said.

In a letter to the SEC’s Market Structure Roundtable, Cronin, speaking in his capacity as global head of equity trading at Invesco, said new equity trading rules are needed for high-frequency trading and dark pools in four areas:


  • Transparency of order routing, undisplayed liquidity and execution practices.
  • More information on market participants and their trading practices.
  • Liquidity on high-frequency trading platforms and other electronic crossing networks (ECN)s.
  • How and when to display orders through the NYSE’s National Market Services and other public forums.

When market data isn’t readily available due to one or all of the points above, Cronin said, this creates the equivalent of an “order anticipation strategy.”
In such a case, the question becomes: Should those order anticipation be considered as improper or manipulative activity? 

Burstein, speaking separately, even suggests that "perhaps there should be a tax on putting in an order and pulling it back" and that the SEC should look closely at whether liquidity rebates, where electronic venues pay firms for placing limit orders to buy or sell a stock when an opposite order comes in, is a "conflict of interest.”

Institutional investors, he said, are worried about whether the high-speed traders are front-running trades ahead of mutual fund orders. The last time this was a big issue was during the boom years of the 1990s.

"We're just not getting a lot of those answers back," Burstein said.

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