A Question of Fairness
How to level the playing field in the financial markets.
By Jerome Simonoff
Today’s inequitable computerized trading practices favor a few powerful investors over the majority. But there is an efficient, economical technological solution.
That’s the topic of this Fair Trading whitepaper.
Executive Summary
The financial markets and the trading exchanges that support them depend on a public perception of fairness. This perception is essential to maintain
the confidence of investors.
At the present time, however, there are a number of technological vulnerabilities in the market that give a small number of ultra-sophisticated traders a decided advantage over others. High-Frequency Trading, Algorithmic Trading, Ultra-Low-Latency Trading and Collocation are the most obvious examples of this destabilizing trend.
In addition, given the current state of the network architecture that supports most of the major exchanges, it is now possible for unethical traders to use technology to delay, disrupt and gain unauthorized access to the orders of other buyers and sellers. Given the windfall profits that can be made, it is reasonable to assume that if the possibility for gainful wrongdoing exists, unscrupulous traders will eventually turn it into an actuality.
Regardless of the scope and nature of the problems, it is the responsibility of self-regulating exchanges and regulatory bodies to correct any trading inequities as soon as they become apparent. Unfortunately, effective oversight on these very important issues is almost non-existent for two basic reasons. The public is not yet fully aware of the transformative dangers posed to the market by inequitable practices. In addition, the current set of regulatory tools does not include a practical, economical solution.
There is, however, an efficient and cost-effective way for exchanges and regulators to address the problems noted above, provide a comprehensive audit trail for both regulatory bodies and the public at large, and level the playing field for all traders and investors.
This solution—an Exchange Gateway Device based on proven network concepts and architecture—can ensure fairness and transparency, moderate volatility, and support the original free market goals of equitable trading and efficient capital formation.
Fairness in the markets depends on equal access to information.
If you visit the website of the U.S. Securities and Exchange Commission (SEC), you will find that the organization’s very existence depends on its ability to maintain equal access to information for all investors. An online article entitled “The Investor’s Advocate” (http://www.sec.gov/about/whatwedo.shtml) states the following:
“The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.”
It’s impossible to overemphasize the importance of that last point: The markets need to ensure the transparency of price discovery, a responsibility that was re-affirmed by James Brigagliano, an Acting Director of the Division of Trading and Markets, in testimony to the Senate Banking Subcommittee on October 28, 2009 (http://www.sec.gov/news/testimony/2009/ts102809jab.htm):
“As markets evolve,” he said, “the Commission must continually seek to preserve the essential role of the public markets in promoting efficient price discovery, fair competition, and investor protection and confidence.”
Mr. Brigagliano also addressed another issue that is having a transformative impact on the markets: technological change.
“The U.S. equity markets have undergone a transformation in recent years due in large part to technological innovations that have changed the way that markets operate,” he said. And later in his testimony, he added the following:
“An exchange brings together the orders of multiple buyers and sellers and is required to provide the best bid and offer prices for each stock that it trades, as well as last-sale information for each trade that takes place on that exchange. This information is collected and made public through consolidated systems that are approved and overseen by the SEC. Any investor in the United States can see the best quotation, and the last-sale price of any listed stock, in real time. This transparency is a key element of the national market system mandated by Congress.” (Note: emphasis added.)
In theory, Mr. Brigagliano’s testimony is reassuring. Unfortunately, the critical trading information he describes is not available in real-time. It is not available to all investors at the same time. As a result, there is a disparity in information access that undermines the fairness of the market and provides an opportunity for market manipulation and exploitation.
Leave your opinion!
You must be logged in to post a comment.