High-Frequency Trading Worries Are Fading, Convergex Finds

The fever may have broken when it comes to criticism of the U.S. stock market.

Convergex Group LLC, a New York-based brokerage, recently repeated a survey it conducted last year in the aftermath of Michael Lewis’s “Flash Boys,” a book that argued trading is rigged. This time, the proportion of financial professionals who said the market isn’t fair to all was 57 percent, a drop from 70 percent almost a year ago. The belief that high-frequency trading is harmful fell to 36 percent from 51 percent.

“The general sense is the house might not be on fire,” Convergex Chief Executive Officer Eric Noll said Friday during an interview with Bloomberg. “What really struck me about the study is that there’s a lot of issues, but they don’t want regulation to fix them. They want a market solution.”

The Convergex study had 245 respondents at mutual funds, hedge funds, broker-dealers and banks. It was conducted from March 17 to 19, and has a margin of error of plus or minus 10 percentage points.

Although members of the industry are more confident about the structural integrity of trading and are less concerned that markets are rigged against them, there are lingering concerns, said Noll, who previously ran exchange operator Nasdaq OMX Group Inc.’s U.S. trading business.

“There are definitely market structure concerns that people want to address having to do with latency arbitrage and order types and market data,” he said.

Latency Arbitrage

Latency arbitrage refers to profiting from differences in the reaction times of various trading venues, while order types are instructions for how exchanges handle trades -- which critics contend give some traders unfair advantages over others.

The sheer number of stock trading venues -- 11 exchanges and dozens of alternative markets including dark pools -- is a persistent issue, and the industry has pushed back by asking for more information about how orders are handled, Noll said.

“They’ve really put the pressure on their sell-side brokers, firms like ours and others firms to say, ‘Where’s my order going?’” he said.

Noll is also a member of the Securities and Exchange Commission’s Equity Market Structure Advisory Committee. The SEC this week approved a proposal that will force some HFT firms to become members of the Financial Industry Regulatory Authority, which oversees brokerage firms’ practices.

“That’s really to track behavior for regulators,” Noll said. “That’s so they’re able to stitch back together somebody’s activity in the marketplace.”

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