In my last blog post, I wrote that intermediation is what makes trading happen. And since the introduction of intermediation by high frequency trading (HFT), it happens at a fraction of the cost. It generated a lot of responses, most of them very favorable, with many echoing the sentiment that HFT is a catalyst that helps the markets run efficiently. However, another point, that HFT-free trading venues tend to only trade very little compared with platforms with HFT intermediation, brought some strange criticisms. Someone even wrote that a disintermediated, illiquid market is great for investors and is especially great for issuers.
I beg to differ.
Issuers want to be very confident that investors can easily buy their stock so they can then go on to hold it. And they want to be sure that when that holder needs to sell some of the stock to pay for college or retirement income, they can do that easily as well. After all, they don’t want their stock to lock you in like a time share. That’s why they list on liquid markets like the NYSE and Nasdaq.
The NYSE has stock stewards called Designated Market Makers and they’re mostly HFT firms. Recently, electronic trading firms Global Trading Systems (GTS) and Citadel announced they were buying the floor broker operations of Barclays and KCG, respectively. They join HFTs Virtu and IMC in facilitating the bulk of floor trading in NYSE listed stocks. Floor traders standing a post may be considered quaint in an era when most trading is electronic, but its symbolism as the personification of vigilance, never goes out of style. And HFT, with its ability to supplement the human oversight of trading in a company with the latest technology is a great model for quick, reliable capital formation.
In short, with four HFT firms on the floor, capital provision which helps drive a major economic engine in this country, will stay in gear.
CEO, Modern Markets Initiative
Arthur Levitt, former SEC Chairman
The Wall Street Journal, August 17, 2009