September 22, 2015
The SEC should examine whether the execution and trade cost benefits of decimalization and electronic access and execution are outweighed by the costs of inappropriate arbitrage, front running, or cascading market risk resulting from current and developing market protocols facilitating high speed or high frequency trading. algorithm trading should be tagged so that it can be examined for purpose and effect.
see
Decimalization and Market Quality
Robin K. Chou
National Chengchi University
Wan-Chen Lee
Ching-Yun Institute of Technology
EFMA 2003 Helsinki Meetings
Abstract:
The relation between tick size and market quality is of interests to both academics and practitioners. The decimalization on the NYSE offers a rare opportunity to empirically examine the effects of tick size change on market quality. This paper performs a thorough study of the influences of tick size change based on the first three pilot stocks and all the NYSE common stocks (the full samples). Our empirical results indicate that, consistent with the literature, both spreads and depth decline significantly after decimalization. Both decreases in spreads and depth suggest that traders whose trade size does not exceed the reduced depth will enjoy lower transaction costs after decimalization. However, the impact on large traders is unclear. This makes it difficult to determine whether the market quality is improved for all traders after decimalization.
Our results show that volume per trade decreases significantly after decimalization, especially for stocks that are actively traded or traded with a larger order size. Such results demonstrate that, after decimalization, either small traders participate more frequently or there are more front-runners entering the market. To examine these conjectures, we examine the changes in degree of front-running surrounding decimalization, and show that the degree of front-running does increase, especially for higher-priced stocks. These evidences support that there are more front-runners entering the decimal pricing system. Furthermore, stocks with different characteristics have different reactions to decimalization. Our results lend support to multiple optimal tick sizes for stocks with different characteristics, instead of a uniform minimum tick size for all stocks.
2. decimalization and HFT
Flash Trade Flap
The Big Money
Tuesday, 4 Aug 2009 | 3:33 PM ET
Slate.com
There's been a lot of chatter lately about high-frequency trading. A recent piece in the New York Times painted it as the economic bogeyman du jour, and New York's irascible everyman Sen. Charles Schumer sent a letter to Securities and Exchange Commission head Mary Schapiro threatening to cook up legislation to ban certain types of HFT unless the agency took it up for him. Even Paul Krugman this weekweighed in on the topic, blasting the practice as one that "degrades the stock market's function." So what exactly is HFT and why are people so concerned about it?
...
How did we get to this point? Yes, computers have been getting faster, but there are a couple of other factors that have laid the groundwork for HFT. The first was a decision by the SEC in 1998 to allow electronic communication networks, or ECNs, to participate in equities trading in competition with the established exchanges....
The other influencing factor was the switch in 2000 to trading stocks in penny increments. Previously, stocks traded per eighths of a dollar, twelve and a half cents at a time. After the SEC enacted decimalization, players who made their money off the difference between the asking price and selling price, aka the spread, were hit hard. If they wanted to stay in business, they had to generate enough volume to make a profit off spreads as small as a penny. Newer and faster computers have made this possible, and it's a big part of the reason why the number of shares traded on a daily basis has jumped to more than 10 billion.
There's no question that HFT players have a leg up based on their speed. But is the advantage unfair? These companies do, after all, have to invest staggering sums of money on hardware and algorithms, so it's not like they don't shoulder some risk. Exactly how much is a number companies keep close to the vest, but the recent arrest of a Goldman Sachs computer programmer gives a small hint. Many assume that the stolen code, which Goldman said in the complaint against its former employee cost millions of dollars to develop, was used
3. There is insufficient data and analysis to know whether High Frequency Trading and potentially enabled Front Running is occurring,
see
http://www.conatum.com/presscites/HFTMMI.pdf
But this article suggests that traders are spending large sums to gain quicker electronic access, including co-location.
The net effects of decimalization, high frequency trading, new electronic access and data feeds needs to be assessed.
There are data needs which should be implemented by the SEC to permit such study.