January 5, 2016
In the 1980's when listed stocks traded in 1/8th increments, the SEC allowed for people to buy equity security order flow from Merrill Lynch and other brokers. In the formative stages this new venture within the financial industry was able to capture about .10 net per share after paying for the order flow.. I never understood why the SEC allowed this practice----the incentive for the Merrills of the world was to give the order flow to the company that gave them the biggest kickback(rebate). There was no assurance that the customer was getting the "best price". To me this was a big conflict. As you know now, one of the first people to establish this type of operation was Bernie Madoff
Fast forward to now, the SEC still allows these kickbacks/rebates to the order provider. That is MY order but they are getting paid for it. The argument is that my commission paid is reduced by the rebate. However, most importantly, there is no assurance that I get the best price. As a retail investor, how can I be assured that I am getting the best price? My impression is that my broker is getting the best rebate for his company without an assurance in this microsecond execution world that I am getting the best price.
Next angle, I was involved when the NYSE was adopting NMS in conjunction with the specialist firms. Reg NMS is very clear that the focus should be on the structure of the capital markets for the long term. However, the SEC allowed the HFT traders to co opt the structure. WHY? Because the co location fees were more attractive to the exchanges rather than the long term structure of the capital markets. The fees were too attractive to pass up.
The exchanges allowed for those paying a higher fee(better colocation spot) to get a first pass at the order flow. As specialists we pointed out this conflict to the NYSE and the SEC on a visit to their Washington DC office. We met with deaf ears. Those that did not pay the highest fees were going to be latent---as a result a loser. This latency still exists and I want a protected quote so I know that the order is treated fairly. In the current market, latency is one of the most unfair part of the structure you have enabled.
IEX could provide this protected quote. In addition, I would be happy to use an IEX router since I am a sole proprietor and do not have the capacity to build my own router.
I read the MIchael Lewis book----I was not surprised at all at the points made in the book BECAUSE specialists pointed out these problems to the SEC and NYSE when Reg NMS was being adopted.
When I send an order to Schwab,etc, I do not want my order internalized. Just like I do not understand the conflicts noted above in the early stages of the internalization model, whose original pioneer was Madoff. I want to meet other INVESTOR orders, not HFT orders that are trying to make money off of MY flow. This solution can happen at IEX, in my opinion.
How can I be assured that I am geting the best price or NBBO when there are TWO feeds, the SIP and Direct feeds. My consternation is further bothered since the SIP feed has a speed bump similar to the speed bump that the NYSE wanted the specialists to have. IEX can help solve this problem.
My orders at brokers are time stamped to the minute----which is absurd since a HFT trader can trade thousands of shares in a second-----how do I know that they are not TRADING AGAINST MY ORDER? This would not happen at IEX
REG NMS specifies that there should not be a direct feed with a speed advantage. However, that is not the environment that the SEC has allowed. IEX would cure this conflict with the Reg NMS. IEX would solve his dilemma.
WHY IS LATENCY ARBITRAGE ALLOWED? TO KILL LATENCY ARBITRAGE like IEX is advocating would severely impair the profits of internalizers. They do not want the very PROFITABLE party to end. IEX is a threat to this bonanza.
IEX is the solution .
Please undo the current capital market structure that is unfair and cheats the individual investor. Allow IEX. Do not be overcome by those that are afraid o lose their bonanza.
DO NOT CONFUSE HFT with MARKETMAKING. In a turbulent market the market maker will be there contra to the order flow. However the HFT will cancel his orders and only appear when the markets have stabilized(meaning they can now make money) In a TRUE market making function, NO ONE EVER makes money EVERYDAY That is the definition of a bonanza and means that the rules/structure are stacked for the HFT firms.
IEX should be approved.