BlackRock Urges Curbs on Predatory High-Frequency Trading

BlackRock Inc., the world’s largest money manager, said regulators should work to rein in predatory high-frequency trading with targeted changes.

Exchanges and regulators need to establish a robust framework to police and identify abuses, while also being careful to distinguish them from practices that ultimately benefit investors such as electronic market-making, the New York-based firm said yesterday in a research paper authored by executives including Barbara Novick, vice chairman, and Richie Prager, head of trading and liquidity strategies.

“‘High frequency trading’ encompasses a wide variety of trading strategies and care must be taken to differentiate predatory practices from practices that benefit end-investors,” BlackRock said.

High-frequency traders have come under unprecedented scrutiny since author Michael Lewis published “Flash Boys,” a book released March 31 that says high-speed traders, Wall Street brokerages and exchanges have rigged the $23 trillion U.S. stock market. New York Attorney General Eric Schneiderman is examining privileges such as enhanced data feeds marketed to high-speed firms, while the Federal Bureau of Investigation is looking into whether those traders are breaking U.S. laws by acting on nonpublic information.

Vanguard Group Inc., the world’s largest mutual-fund company, has been working with brokers, regulators and exchanges for years to improve market structure, Joe Brennan, global head of Vanguard’s equity investment group, said last week. Capital Group Cos., with $1.14 trillion in assets, has backed a startup exchange that seeks to protect investors from predatory traders.

Trading Tactics

Individual investors shouldn’t be affected by high-frequency trading because of the way small orders get filled under normal market conditions, according to BlackRock. For institutional investors, there is the risk that transaction costs could be inflated by predatory high-frequency trading, the firm said. To combat that, BlackRock uses technology to assess execution venues, employs different trading tactics and measures execution quality before, during and after a trade is completed.

Bill Gross, chief investment officer of Pacific Investment Management Co., said in a Bloomberg Radio interview with Tom Keene on April 4 that Lewis has an argument and changes should be made in equity trading. Each investor should have an equal opportunity to place an order and get it to its final destination, said Gross, 69.

Dark Pools

Lewis’s book centers on Brad Katsuyama, president and chief executive officer of IEX Group Inc., an exchange that opened in October. While IEX welcomes high-frequency traders as market makers, the firm has curbs that slow the pace of buying and selling. It’s pitching itself as a haven for asset managers who want protection from trading practices they consider predatory. Money managers including Capital Group, David Einhorn’s Greenlight Capital Inc. and Bill Ackman’s Pershing Square Capital Management LP are shareholders.

Dark pools are an “invaluable execution tool” for large orders and stocks that may be more difficult to trade because of wide spreads or low liquidity, BlackRock said. Dark pools should be required to provide more information such as how they prioritize orders and fees, in addition to a Financial Industry Regulatory Authority rule that will soon require them to disclose volume, the firm said.

IEX is a dark pool that has ambitions to convert into an exchange.

BlackRock manages about $2.3 trillion in stocks, or 57 percent of the $4 trillion it oversees in long-term assets as of Dec. 31, according to a regulatory filing.

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