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Rebecca Healey, TABB Group

'Flash Boy' frenzy hits London: A disappointing story

The Michael Lewis PR machine hit London last week, leaving a trail of obfuscation in its wake. According to TABB Group Europe’s senior research analyst Rebecca Healey, Lewis describes a buy side unaware of what’s happening in the market. However, this hapless bunch of individuals he portrays is not representative of the industry…

Screaming headlines on how pensioners are being robbed by evil market makers practicing the dark art of automated trading or stealing milk (really) have once again thrown the spotlight on high-frequency trading.

But Mr Lewis has been exceptional in his ability to manipulate the information in order to tell his “story.” This is disappointing as the industry would benefit from an honest and open debate on HFT – one based on fact, rather than fiction.

The Positive

Lewis did highlight the issue of predatory HFT activity, and the pitfalls of interacting with those firms focused solely on latency arbitrage. However, in Europe, because we do not suffer the indignities of the Route-on-Rule (Regulation NMS), buy-side participants are already aware of this issue (see and are choosing to engage with HFT activity on their terms.

Debates in recent years on the supposed benefits or evils of HFT are irrelevant. The fact is, we are where we are given changes in the regulatory system and advances of technology, in that trading has evolved from the proprietary dealing model that enabled market makers to take a turn on the liquidity they provided when facilitating trades between two clients. Regulatory changes led to shifts in rulemaking and greater transparency into both order flows and activity that continue today under MiFID II.

We are also in an environment now where asset managers and their order sizes are increasingly relative to the rest of the market, a particularly difficult issue in Europe.

The US is one market; Europe is a multitude of markets, often with very thin liquidity as soon as you step away from the leading stocks in each country. Small- and mid-cap names are becoming almost impossible for the buy side to trade in the traditional manner. Sell-side small- and mid-cap desks have closed down.

Conversely, the size of asset management firms and internal aggregation of their order flow has led to increasing buy-side order sizes. As these orders become harder to execute without incurring market impact, there is a need for client facilitation, and HFT has stepped in to fill the void.

The question now should be whether HFT market participants are the right people for the job and whether they are doing this in the right manner.

Rather than legislate against a group of market participants, we should be focussed on eradicating certain abusive behaviour (see previous TabbFORUM articles published at 

The Benefits of Technology

Automation delivers choice and fosters lower spreads and commissions – all of which benefit the end investor. The focus now must be on the explicit versus implicit cost of trading and greater analysis of routing behaviour, venue analysis and, ultimately, transaction cost analysis (TCA). The full audit trail provides the ability to track and monitor behaviour, assess risk more efficiently and monitor poor performance and even abuses.

Would the recent scandals in FX have happened in automated markets that could be scrutinised more easily?

Are there elements that still need to be addressed? Absolutely, but these are wider market structure issues, not HFT.

Who provides liquidity to the marketplace and how can this be achieved?

Should payment for order flow exist?

How do you incentivise someone to make a market in an illiquid name that trades once a year?

Politicians would like trading activity to be buy-side to buy-side. However, the difficulty is that few asset managers want to trade in opposite directions at exactly the same time in exactly the same size. Added to which the growing amalgamation within the asset management industry will mean that the big firms just get bigger – as do their orders – only adding to the complexity in executing order flow.

Who Says the Buy Side Doesn’t Know What’s Going On?

Mr Lewis spoke 30 April at the Royal Geographical Society in London, where he claimed that buy-side firms never sit down together, never have a conversation, and don’t understand what is happening.

As someone who has personally spent time listening to a buy-side participant walk a regulator through his firm’s technology for scrutinising broker behaviour and monitoring best execution, I simply have no idea who Lewis is referring to.

This hapless bunch of individuals he portrays is not representative of the institutions I speak to.

Claims that the buy side have been ripped off for years may have held sway a decade ago, but I have sat in countless meetings with buy-side and sell-side firms and vendors, all working together to improve the marketplace through FTC and other industry bodies. I have even moderated a panel discussing these exact issues, with Getco and Remco Lenterman on one side and Franklin Templeton and State Street represented on the other. Here in Europe, if you are not endeavouring to fix the problem, you are part of the problem.

IEX has received great feedback from buy-side clients I have spoken with since the summer of 2013. And while Brad Katsuyama is doing a fantastic job, there is no messiah here. There is not one individual, but many who are doing the best they can – in whatever form that may take – to improve the functioning of the markets.

When I quizzed Mr Lewis at one of his book signings as to why he had chosen to focus solely on IEX and not Liquidnet or Nanex or any of the countless FPL initiatives to counter HFT, his defence was: “I was telling a story.” The problem is that Mr Lewis was telling that story to anyone who would listen.

Impartial, rigorous debate delivers concrete improvements over time; sensationalism sells books. Now we have retail investors in the US demanding to route to only one venue, from over-competition to zero competition.

Neither is an optimal measure.

Harsh Facts

While Lewis is not saying anything new (and we may take umbrage as to how he has chosen to say it), we as market participants have to accept one key fact: He has hit a raw nerve in the wider community.

Like it or not, financial services are still viewed by the general public as not working for them. That is really what we should be focused on, engaging with the regulators to make sure that financial services do work for the wider community.

There is much that the industry could do to improve its public perception.

Saying so, I was reminded recently by what Edmund Burke once said: “All it takes for evil to flourish is for good men to do nothing,” which is why we should be focused on working with regulators to fix our markets.

As for Mr Lewis, says Healey, he should stick to selling stories, which clearly he does very well.

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