Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Peterffy’s HFT Solution for Genuine Market Making

Financial Times Published: April 12, 2014
From Ms Janet Tavakoli.

Sir, Brooke Masters’ indulgence in nostalgia did nothing to alert somnolent authority to novel dangers. (“Trading misdeeds perpetrated under a different guise”, The Top Line, April 5).

High frequency spoofers hid behind the story that the technologically superior led the forces of good against the empire of evil, the technologically inferior former pit traders. The solution to gaming is not to create another exchange that may internally prioritize brokers’ trades, as Michael Lewis advertised in Flash Boys. That’s simply double-spin. Contrary to the perhaps inadvertent suggestion in Masters’ article, the low trading volume on the New York Stock Exchange is a bad sign.

Rather the solution is to drive business from dark pools onto large exchanges and delay orders by say, a tenth of a second, except for quote updates from market makers in products for which the market maker has affirmative obligations—including the wherewithal to back transactions—and is registered. That way, genuine market makers cannot be picked off.

Thomas Peterffy, Chairman and CEO of Interactive Brokers, proposed this solution years ago, including in testimony before the U.S. Congress. He estimates that internal trading is costing U.S. investors approximately 28 cents per 100 shares. In Europe, where internal trading is entrenched, investors lose more than 2.80 Euros per hundred shares traded.

Peterffy’s solution can be globally applied, with few modifications, to all electronically traded products.

Since the September 2008 crisis, scandals have rocked every systemically important financial product, highlighting the enormity of manipulation. Until we reform our captured regulatory system, exact fair compensation for bank subsidies, oust corrupt politicians, and prosecute control fraud at financial institutions large and small, we will suffer global systemic risk wrought by our broken financial system.

Janet Tavakoli, President, Tavakoli Structured Finance, Chicago, IL, US

See also: “Michael Lewis, Wall Street’s Smart Aleck Apologist” – March 15, 2010

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