Chilton: HFT is good for markets, but trading rules need to be simpler
The bonfire of passions over high frequency stock trading has calmed a bit in the year since Michael Lewis’ book “Flash Boys” arrived. But the embers are still hot.
A new client survey by the institutional brokerage firm ConvergEx released this week showed that while 57% of respondents feel the markets are not fair for all participants, that’s down from 70% who said so a year earlier. And 36% said that HFT is harmful or very harmful to U.S. equity markets, down from 51% last year.
More than 40% of the buy- and sell-side professionals surveyed said they had changed the way they approach stock trading in response to the HFT debate, though most said the changes were “slight,” such as requiring more disclosure from brokers about how their orders are routed.
The suspicion toward opportunistic electronic short-term trading systems persists, even as many measures of stock trading speed and cost show that public investors are getting a pretty decent deal.
Bart Chilton, a former commissioner of the Commodity Futures Trading Commission, says in the attached video that the “facts” support the conclusion that “markets have actually become safer, faster and cheaper for average investors” and “the evidence is that HFT, and electronic trading, has really added to liquidity.”
As a regulator, Chilton was a critic of HFT practices, once calling them “cheetahs” which should be “caged.” Today, he is a private-sector lawyer with the Washington firm DLA Piper and works on behalf of the HFT advocacy group, Modern Markets Initiative.
Chilton’s change of tone has coincided with his professional shift. But Lewis himself has also struck a more moderate tone as he makes the rounds ahead of the publication of the paperback edition of “Flash Boys.”
Lewis told us this week that the little guy does just fine under the current system. But he still suggests there’s a broadly dispersed “tax” on investment, which grows from the fact that rules allow faster market makers to exploit real investors’ order flow.
Chilton pushes back on the idea that HFT folks improperly jump ahead of bids and offers from unsuspecting real investors.
“Mr. Lewis has talked about front-running. As a regulator who actually knows the law, I know what front-running is,” Chilton says. He says the law defines it as a broker entering an order ahead of a customer’s order. “It is not getting information and somehow reacting to it quickly.”
Defenders of HFT say that a large investor order, once it enters the market, is material information, and reacting to it by moving quotes is fair game. Chilton contends that HFT firms are not only fast, but also “smart,” running programs that hunt for orders that seem “wrong” based on statistical probabilities.
Critics say various order types and privileged data feeds allow HFT too much of an advantage to capture small price differences before perhaps another public investor has the chance.
What experts and commentators on both sides of the HFT debate often agree upon is the fact that the present arrangement of the stock-trading system is unnecessarily complex and therefore vulnerable to breakdown in stressed market conditions.
Chilton says, “Market structure needs to be looked at. We have 40-some ‘dark pools,’ we’ve got a bunch of exchanges, and everything is so complicated,” with myriad order types that have built up through years of ad hoc rulemaking.
“To me it seems like we should have more transparency in the order types, that they should be more simple," he says. "And I think that will add to investor confidence, which would also help markets.”
