BrokersMinutes

Off Topic with Irene Aldridge




Alpha Pages: You took great issue with Michael Lewis’ claim that the market is “rigged.” Why?

Irene Aldridge: On the Michael Lewis topic, I suppose I am most disappointed in the pay-for-play quality of the book. Even the fastest best-selling writers can tell you that they are only capable of writing 15 pages per day, at best. To write a 300-page book, [is] a five-month process, at a bare minimum.
Incidentally, at the time Mr. Lewis’s book was released, the trading venue around which much of the book revolves, has been in existence for, wait for it, exactly five months! In other words, Mr. Lewis began to write the novel about his great protagonists and its creation prior to the launch of this trading venue at the center of this book—I really don’t see how he could have covered this in depth. [It appears to be an] elaborate marketing campaign for this trading venue. In other words, the book is marketing masquerading as a fair markets discourse. For a writer like Lewis, stooping so low is a complete disgrace. Markets have moved a long way toward fairness since then, so most of his criticism is completely unfounded.

AP: Is high frequency trading taking the heat for problems caused market structure or regulations?

IA: From what we are seeing, this HFT pre-hedging that boils down to front-running [may have] unfortunately become common practice following the Volcker and Dodd-Frank rules. There still exists a FINRA rule that encourages brokers to avoid front-running, but FINRA is a self-regulatory organization, and the consequences of not following its rules [may not be so harsh]. While most of ABLE Alpha clients have the permission to access the markets directly and, as a result, avoid front-running, many smaller entities are not so lucky and end up losing money. I do not believe that this is what the regulators had in mind when they designed the laws, but these are the unintended consequences.

AP: There is an ongoing argument over whether HFT is a net liquidity maker or taker as opposed to traditional market makers?

IA: I was just presenting at the Princeton Quant Trading conference, where a fellow speaker, [from a] prominent broker discussed how they are forced to spend money to build systems that monitor the number of zeroes human brokers put at the end of their orders simply because brokers so often come to work hung over and unable to focus. Well, needless to say, hangovers do not happen to computers. Overall, the computers are considerably cheaper, more reliable and less demanding than human brokers, so there is absolutely no doubt in my mind that the computerized trading technology, known as HFT, will replace most of the presently-human trading operation at brokers in continuing the digital revolution observed elsewhere in the society.

AP: Will the size of HFT be self-correcting? Will algorithms exploit inefficiencies until they’re gone?
One of our products is the HFT Index, science, not hear-say, based [on a] real-time estimate of aggressive HFT participation in electronic markets of customer choice. According to our estimates, activity level of aggressive HFTs by volume averages 15% to 20% in most markets, although intraday it may spike up 100%, or drop to 0%.
According to the HFT Index, many highly liquid securities have the lowest HFT participation as a percent of overall volume, seldom exceeding 15%, while some other instruments are dominated by the aggressive HFTs. Painting the entire market with a wide 50% HFT brush gives little insight into what we and our clients are actually seeing.