SEC Closes In on Rules That Could Reshape How Stock Market Operates

cruisecontrol said:
Absolutely shameless argumentation by these wholesalers. They think we are stupid.


Tigher spreads compared to what? A time before HFTs existed? Spreads were driven down by decimalization and the introduction of HFT and other technology. There's no logic for a claim that PFOF drives down spreads, in fact basic economics suggest the opposite, because it is an anti competitive. As Citadel themselves explained in 2004.


Precisely what kind of "best execution" for every order is he talking about? They have literally no obligations other than being no worse than NBBO. The incentive for them to provide better prices is flawed and weak at best because there is no proper market for competition among these players. That is precisely what the proposal is addressing with the auction idea.
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Agreed. The only way we get the best price is through competition.
 
schizo said:
Political lobbying, perhaps? By the same token, shouldn't the SEC have banned HFTs from front-running everyone else's order by now? No, never. Because they know leveling the field makes the so-called "smart money" look not so smart in the end.
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HFT is not from "smart money" though. It's just richer dumb money imo.
 
The way I see it if the SEC really wants to ensure fair dealing for retail traders in eliminating PFOF, what it should do is reform the exchanges to have retail traders' orders routed directly to the exchanges bypassing the brokers. The brokers should be the custodians of traders' accounts and the lenders for margin trading but traders' orders need not pass through them. That would truly be "direct trading" where traders truly trade directly against each other on central exchanges, completely cutting out the middlemen. And at the same time, it should ban HFT so nobody front-runs anybody.

Of course that's in a perfect world. How it is going to be in the real world is yet to be seen.
 
TheDawn said:
The way I see it if the SEC really wants to ensure fair dealing for retail traders in eliminating PFOF, what it should do is reform the exchanges to have retail traders' orders routed directly to the exchanges bypassing the brokers. The brokers should be the custodians of traders' accounts and the lenders for margin trading but traders' orders need not pass through them. That would truly be "direct trading" where traders truly trade directly against each other on central exchanges, completely cutting out the middlemen. And at the same time, it should ban HFT so nobody front-runs anybody.

Of course that's in a perfect world. How it is going to be in the real world is yet to be seen.
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You are thinking in the right direction, one goal should be to cut out middlemen by letting retail trade against itself. The other goal should be to increase competition among middlemen.

Routing directly to exchanges would help with the latter, but not with the former. Mostly this would just be a shift from PFOF wholesaler middlemen back to old fashioned HFT middlemen.

Sure you could try to "ban" HFT but what does that even mean really.. HFT is a natural consequence of technology and the market structure. Any ban would run into problems with their definition of what behavior is prohibited and there would be loopholes pretty much guaranteed. imo what you really need to do is design a market structure where (1) speed isn't naturally such a huge advantage and (2) there are lower barriers to entry so that there is more competition among the fast players.

Generally speaking, in order for a retail order(*) to have a decent chance of trading against another retail order on the other side, enough time needs to pass for that contra order to appear. This amount of time is an eternity by HFT standards. You really need something like an auction where the liquidity has a few seconds to form in order to meaningfully reduce the amount of intermediation.

Intermediation is not necessarily a bad thing because it allows the trades to happen more quickly. However in order to keep the intermediation costs down, competition is essential. An auction mechanism that is open to a large number of participants would accomplish this nicely.

Fragmentation is also a huge issue if you just route to exchanges. Which exchange should orders be sent to? A single auction mechanism solves this nicely.

I really think the SEC is on the right track with the suggestion of an auction mechanism. I just hope they don't unnecessarily limit who is providing liquidity in the auctions to just the same firms that are wholesalers now.


*When I say retail order, market order is implied. It is very difficult for humans to use limit orders without getting taxed by HFT unless you slow the whole market down by a factor of a million.
 
cruisecontrol said:
You are thinking in the right direction, one goal should be to cut out middlemen by letting retail trade against itself. The other goal should be to increase competition among middlemen.

Routing directly to exchanges would help with the latter, but not with the former. Mostly this would just be a shift from PFOF wholesaler middlemen back to old fashioned HFT middlemen.

Sure you could try to "ban" HFT but what does that even mean really.. HFT is a natural consequence of technology and the market structure. Any ban would run into problems with their definition of what behavior is prohibited and there would be loopholes pretty much guaranteed. imo what you really need to do is design a market structure where (1) speed isn't naturally such a huge advantage and (2) there are lower barriers to entry so that there is more competition among the fast players.

Generally speaking, in order for a retail order(*) to have a decent chance of trading against another retail order on the other side, enough time needs to pass for that contra order to appear. This amount of time is an eternity by HFT standards. You really need something like an auction where the liquidity has a few seconds to form in order to meaningfully reduce the amount of intermediation.

Intermediation is not necessarily a bad thing because it allows the trades to happen more quickly. However in order to keep the intermediation costs down, competition is essential. An auction mechanism that is open to a large number of participants would accomplish this nicely.

Fragmentation is also a huge issue if you just route to exchanges. Which exchange should orders be sent to? A single auction mechanism solves this nicely.

I really think the SEC is on the right track with the suggestion of an auction mechanism. I just hope they don't unnecessarily limit who is providing liquidity in the auctions to just the same firms that are wholesalers now.


*When I say retail order, market order is implied. It is very difficult for humans to use limit orders without getting taxed by HFT unless you slow the whole market down by a factor of a million.
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With regards to market structure that does not favour speed, I believe the current market structure is already built this way with the execution priority given first to price, second to volume and third to speed although I stand to be corrected. At least open-book order-matching system like Island operated that way.

Second the aim for fair dealing for retail order is not necessary to always have it absolutely matched against another retail order; it's just to have that order matched with the best price with the highest volume of it in the shortest time, i.e. best execution possible, period. It doesn't really matter whether the order was matched by another MM, another institution, hedge fund or another retail trader on the other side. The problem with PFOF is the lack of exposure of the order to the market hence the potential for the order not receiving the best execution because of the lack of competition.

The Auction system might have solved the lack of competition problem but it might maintain another problem with PFOF: loss of anonymity and exposure of position to the opposing side. With the PFOF, pretty much all of the retail traders' orders are executed by the wholesalers, our positions, the volume of our trades at which price points are open book to them. They pay for our orders so they know exactly where our stop orders are, our tp orders are and which price our orders are entered. Those are all information of retail orders that are supposed to be private that otherwise could potentially allow retail traders to be taken advantage of but now are all exposed for all to use under PFOF. I dunno how the auction system is going to be set up but the same loss of anonymity would arise if only retail orders are being auctioned off. If institutional orders can remain anonymous, so should retail orders. And in fact all orders should be indistinguishable from each other and that's why I feel retail orders should be sent directly to the exchanges from the trader's device of trading, bypassing the broker.

I don't understand why is it so hard to just have everybody's orders sent to central exchanges to be matched with other orders. It had been done before. And I actually don't agree with the banning of the rebate system. In order to encourage order volume, paying rebates for limit orders is actually a good idea. And I don't agree that it's difficult to curtail HFT. All you have to do is implement a threshold of minimum latency. Yes HFT is the result of the advancement of technology but it doesn't mean that it should be allowed to be used if it affects fair dealing negatively in a marketplace. I mean atomic bomb is also the result of the advancement of technology but do we allow its usage?
 
I would oppose changes to the current system, because additional regulations, including killing pfof, would lead to higher costs for us retail traders especially re commissions.

From a practical standpoint we all get near instant fills with tight .01-.02 spreads for most-active stocks and ETFs.

If commission-free brokers gain a few cents per trade for pfof routing, so what? Certainly beats commish load.

If it's not broke, don't fix it. Proposed changes would substantially increase cost to retail traders. OPPOSE.
 
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