"I know it when I see it" Supreme Court Justice Potter Stewart famously wrote in 1964 while attempting to define precisely what was - or wasn't - to be considered hard core pornography. It's a quip that's not only stood the test of time but has been applied to all sorts of different circumstances over the years, the latest of which coming on Capitol Hill, where a gaggle of lawmakers, regulators and investment industry players are trying to tackle one of the most contentious and dangerous problems facing our capital markets now.
I am referring to "high frequency trading" (or HFT) and the ongoing debate over what to do about it that has raged since the Flash Crash rocked the markets in May of 2010. While individuals and institutions have knocked high frequency traders, called them names, and blamed them for all sorts problems, veterans like Joe Saluzzi, co-founder of Themis Trading and author the book "Broken Markets" says you have to "define the problem before you fix it."
To many of us, 100 trades per day would be considered high frequency, let alone 100 trades per second. Which is why applying a speed limit would have very different impact on individuals and the markets. After all, HFT is not illegal, it's just annoying.
"It's very difficult to fix but we do know what the problems in the market are," Saluzzi says, adding that the root cause of the problems is market structure issues. "The dominant force in the market is scalpers and they're all looking for that big institutional order, where the host is me and my big institutional order and the parasites are just going all around me trying to pick me off all day long."
As for fixes, on the one hand, Saluzzi says you have a debate that is still dominated by the big brokerage firms and exchanges, which he says are now all for-profit businesses -like NYSE Euronext (NYX), Intercontinental Exchange (ICE), and Nasdaq OMX (NDAQ)- that are catering to the needs of their biggest (e.g. most active) clients.
But with the integrity of our capital markets at risk, and HFT volume accounting for a larger and larger percentage of trading activity, Saluzzi and many others like him say the time for action is now.
"The SEC needs to step in and protect the interest of the long term investors," he says, "Who of long-term versus short-term and capital formation become an issue the SEC must protect the long term investor."