Lime Brokerage CEO Defends High-Frequency Trading
Jeff Wecker, CEO of Lime Brokerage, defends HFT and argues the trading strategy adds liquidity and brings efficiency to the markets.
By Ivy Schmerken More from this author
MAY 19, 2010
Jeffrey Wecker, president and CEO of Lime Brokerage, recently vigorously defended the performance of high frequency traders on May 6th, the day of the flash crash, against critics who blame the fast traders for pulling back on liquidity.
“We saw hundreds of millions of shares traded by our HFT clients Thursday with no issue,” commented Wecker, who spoke at Accelerating Wall Street, an event hosted by Wall Street & Technology on May 11th, only five days after the market’s 20-minute rollercoaster ride.
Reform vs. Innovation: Opening the Right DoorsAchieving Compliance In Energy And Commodity MarketsEnergy Risk: Consultant’s Outlook 2010 In his keynote speech, Wecker, whose firm provides a low latency trading infrastructure to high frequency traders, said: “Though we did see fast moving markets, we also saw people backing off the bids and offers and also plowing back in and trying to trade. This is a prime example to us of HFT continuing to bring efficiency to the markets,” said Wecker.
As for his firm’s trading infrastructure, “Comprehensive pre-order controls were put in before any single order or trade,” said Wecker, who later on predicted that these controls would become a regulatory requirement.
Despite media reports that some high frequency trading firms shut off their strategies and withdrew their bids and offers so there were no bids no counter the selling pressure of algorithmic trades hitting the electronic venues, Wecker defended the HFT community. “I believe that HFT is being inappropriately blamed as a part of a witch hunt. It’s amazing to see this form of argument equating ‘fat finger’ trading with high frequency trading,” said Wecker.
Fact From Fiction “There is so much noise in the market that it’s challenging to separate fact from fiction,” he continued. “I believe the events of the last week serve to heighten the awareness and importance of HFT in today’s markets but at the same time, it created a whole new host of commentators on the form of trading.”
To correct some of the misinformation in the market, Wecker went on to define HFT, illustrating the gamut of strategies operating under the HFT category. “We think about it as electronic liquidity provision, firms that are simultaneously on the bid and offer on as many securities as they can, except when they have a signal. In some cases, they are engaged in rebate arbitrage or capitalizing on exchanges fees of market centers,” explained Wecker.
He also cited different types of HFT strategies, including statistical or quantitative arbitrageurs, as firms that identify fleeting anomalies between two or more securities, falling under HFT. Some of these anomalies only last for a split second, minutes or hours, said Wecker, who also talked about index arbitrage and volatility arbitrage trading as other examples of HFT. Since larger houses mix and match in their strategy engines several of these styles of trading, the noise about HFT is not very discriminating, his comments implied.
Now that politicians are influencing the regulation of HFT, Wecker addressed the accusations that HFT traders are gaining an unfair advantage.
Achieving Compliance In Energy And Commodity MarketsEnergy Risk: Consultant’s Outlook 2010The New Data Imperative: Managing Real-Time Risk in Capital Markets Executive Brief “We need to agree on what is fair access to markets. The opportunity is to invest in technology and innovation to gain an edge,” said Wecker. “Not everybody has to make the investments. We can choose to make the investments we need. Some of the discussion about HFT is forgetting the importance of technology that new ideas can bring,” he contended.
A Race to the Bottom? Another running theme in the speech was the concern about overreaching regulation and the impact it could have on curbing liquidity. “We need to avoid a regulatory environment that becomes a race to the bottom,” said Wecker, who cautioned about rules that would affect the liquidity and quality of the markets. He referred to “terrible ideas” out there, such as “imposing order delays and allowing people that don’t invest in technology to somehow get an advantage over people that invest in technology.”
Another idea revolves around batching orders and doing a series of mini-auctions, which Wecker said sounds interesting but could reduce liquidity. In addition, he cited a large-trader rule proposed by the SEC as being “highly politicized” and “somewhat superfluous,” noting that Lime already tags every order with a unique identifier in case of any FINRA investigation. But Wecker said his firm would abide by any large-trader rule if the regulators want it.
Predicting what’s ahead, Wecker said to prepare for a ban on naked or sponsored access. Lime has supported a ban on naked access and pre-trade risk controls on sponsored access. “Fortunately for us, if that’s all we wind up with we’re fine because it levels the playing field for all industry participants,” said Wecker.
To ward off excessive regulation of the industry, Wecker emphasized the need for disclosure of certain practices that leak information. “Any structures that provide an unfair advantage to certain participants — such as preferential order types, indications of interest [IOIs], broker flash orders to their customers or dark pools doing propriety trading —should be disclosed,” he said.
Overall, the biggest cloud hanging over the industry is “indecision about how to prepare for the regulatory and legislative changes,” Wecker said.
“The challenge we have in the HFT marketplace is addressing a lack of education and engagement,” he added. “We have a personal responsibility to touch everyone and educate [them as to] what is that we do.” |
