"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Thursday, October 20, 2011

Interactive Brokers Jumps In The HFT Mix: Offers Insight Regarding HFT Marker Participation And Their Effects On Market Making

peterffy The WSJ interviewed Thomas Peterffy of Interactive Brokers and they were able to squeeze out of him his idea for maintaining order in today's financial markets while at the same enabling the existence of HFT.  Nanex recently released a great paper regarding the way exchanges and law-makers are able to dictate how HFT should be allowed to trade.  Nanex proposed a 250-millisecond threshold limit for identifying a trade as immediate.  Read more about the Nanex open proposal here.  As for the "father of computer trading" here is his view: "Mr. Peterffy has a solution: Require exchanges to hold orders for one-tenth of a second, while allowing registered market makers, such as Interactive, to trade at will".  We'll see where this ends up but at least we have seen the beginning of more news flows regarding regulators and marker makers desiring and discussing ways to enable HFT to compete while maintaining fair and orderly price discovery in markets for humansWe're just happy they are trying and not lying or trying to deceive investors like this guy.

From The WSJ:
Thomas Peterffy, chief executive of Interactive Brokers Group Inc., says computer-driven high-speed trading firms have made the market less efficient—and less safe.

While a number of Wall Street traders would agree, this argument may seem surprising coming from the 67-year-old Mr. Petterfy: He is widely considered the father of computer trading, a position that has made him a billionaire several times over.

"He's the guy who brought automation to the industry," said Richard Repetto, an analyst with Sandler O'Neill who tracks Interactive Brokers, a Greenwich, Conn., electronic broker-dealer. "Now he's railing against the high-speed traders."

Thomas Peterffy, CEO of Interactive Brokers Group, made his fortune developing automated market systems.

Mr. Peterffy says that for several years his firm, a registered market maker that makes firm commitments to buy and sell securities on behalf of investors, has been getting hurt as high-speed traders jump ahead of it in the market. While market makers are typically required to offer to trade throughout the day, high-speed traders have little or no commitments and can leap in and out of the market at will.

Mr. Peterffy maintains that high-speed trading firms tend to pull out of the market when trading gets volatile, putting Interactive, which keeps trading, at risk of taking big losses and posing a threat to the stability of the broader market. A large number of firms buying and selling together acts like shock absorbers, taking the sting out of volatile markets. When they withdraw, there is little cushion to absorb the shock.

High-speed traders counter that Mr. Peterffy's claims are little more than sour grapes. While he made a fortune beating competitors with better technology, he now complains when the shoe is on the other foot, some say.

High-frequency trading has been a powerful and growing force in the market in recent years, accounting for more than half of all trading volume in U.S. stocks. Its advocates say it makes markets more efficient and brings down costs for most investors.

Mr. Peterffy agrees that high-frequency trading does bring some benefits. But he argues that it can make it harder for large firms such as Interactive to make markets.

High-speed traders' flighty nature can lead to big swings, Mr. Peterffy says, such as the computer-driven "flash crash" on May 6, 2010, when the Dow Jones Industrial Average fell about 1,000 points before rebounding. The Securities and Exchange Commission in a report said the flash crash was worsened when a large number of high-frequency traders sold their positions, pushing stocks down further, before they pulled out of the market altogether.

Mr. Peterffy saw similar behavior in August, when the market swung wildly amid fears of the debt crisis in Europe. Many high-frequency firms stopped trading, he says, putting Interactive Brokers in a vulnerable position as its market-making firm often operated in a vacuum.

High-frequency traders are "fair-weather market makers," he said in an interview. "When the markets came under serious stress [in August], we felt like we were standing on the precipice by ourselves, staring into the abyss."

Mr. Peterffy has a solution: Require exchanges to hold orders for one-tenth of a second, while allowing registered market makers, such as Interactive, to trade at will. 

The requirement could put a dent in many high-frequency strategies, which rely on the ability to get in and out of positions as speeds measured in milliseconds, or one-millionth of a second.

In January, Mr. Peterffy met with SEC Chairman Mary Schapiro and told her his recommendation. He says he doesn't know if the SEC is considering his advice. An SEC spokesman confirmed the meeting.

peterffy_jumpOn an earnings conference call earlier this year, Thomas Peterffy said the market had become 'a runaway train with no one at the switch.'
The high-speed tactics have come under scrutiny by regulators, who are looking into how the trading affects the market. In a speech in May, Ms. Schapiro questioned whether high-frequency algorithms are "programmed to operate properly in stressed market conditions."
High-speed firms worry that putting up barriers to trading presents advantages for a select few and could hurt the market if a number of such firms are unable to trade profitably.

"We shouldn't have policies that are designed to benefit or hurt specific participants, they should be designed to make the market better for everyone and more fair for everyone," said Adam Nunes of Hudson River Trading LLC, a New York high-frequency trading firm.
Mr. Peterffy's position on high-speed trading is remarkable for someone who long believed that automated trading through computers would make the market work better.

Mr. Peterffy, who immigrated to the U.S. in 1965 from Hungary, first started working on Wall Street in 1969. He quickly learned computer programming, which he found easier to pick up than English. Using his computer skills to crunch options prices, he launched his own options-trading firm in 1977 and quickly began racking up big profits.

In 1983, he devised the first handheld computer used to trade on the floor of an exchange. His firm, Timber Hill LLC, gained a reputation as one of the most sophisticated trading operations in the U.S. Its success inspired hordes of competitors.

In 1993, Mr. Peterffy launched Interactive Brokers, offering the advanced technology developed by Timber Hill to regular investors. Timber Hill became the market-making unit of the company, which went public in 2007.

Hurt by the new breed of competitors as well as a drop in overall market volatility in 2009, Interactive's market-making revenues started to slip.

On an earnings conference call with analysts in January, Mr. Peterffy said the market had become "a runaway train with no one at the switch."

Shares of Interactive Brokers are down more than 50% from their initial offering price. The company is expected to report third-quarter earnings late Thursday. Analysts expect net income of 23 cents a share, on average, compared with 26 cents a year ago.