Latest / Bloomberg Intelligence / Larry Tabb Sees Problems With Trading Prices and IEX (Audio)

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Larry Tabb Sees Problems With Trading Prices and IEX (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim
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  Speaker 1: Fox on Bloomberg Radio. The I e X. If you
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  Speaker 1: go to the Investors Exchange website, the i X S
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  Speaker 1: I e X I should say it says it's the
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  Speaker 1: first equity trading venue owned exclusively by a consortium of
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  Speaker 1: by side investors, including mutual funds, heads funds, family offices.
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  Speaker 1: In fact, Bread katsu Yama, the I e X co founder,
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  Speaker 1: says this new stock exchange will make people safer. It's
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  Speaker 1: now been approved with National as a national exchange. But
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  Speaker 1: our next guest says he's not sure this is such
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  Speaker 1: a good thing for investors. Let's ask him why we're
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  Speaker 1: welcoming now. Larry Tab, CEO and whole founder of the
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  Speaker 1: Tab Group based here in New York. Larry, thanks for
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  Speaker 1: taking time for taking stock. Al Hi, Kathleen, thanks for
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  Speaker 1: having me so in your words, explain to our listeners
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  Speaker 1: what the I I e X was and remind is
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  Speaker 1: why it was found in the first place. Well, well,
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  Speaker 1: first of all, hats off to those guys say there
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  Speaker 1: now or will be a fully fledged exchange good for them. UM.
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  Speaker 1: I X have founded kind of on the heels of
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  Speaker 1: of Michael Lewis's Flash Boys book that really talked about
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  Speaker 1: latency arbitrage and in picking off investors and the whole
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  Speaker 1: idea of that UM you know, the markets were not
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  Speaker 1: so safe for investors. I won't use the R word
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  Speaker 1: but because I don't believe in it. But but that's
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  Speaker 1: kind of the premise that I e x UH was
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  Speaker 1: born under. And UH. One of the key foundations of
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  Speaker 1: their platform is a speed bump, basically a very short
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  Speaker 1: speed bump three and fifty microseconds each way, basically seven
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  Speaker 1: microseconds in and out UH to ensure that that UM
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  Speaker 1: UH high frequency traders don't pick off limit orders and
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  Speaker 1: and to a certain extent, UM it's a good premise.
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  Speaker 1: It works well. They've gained share UM institutional investors tend
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  Speaker 1: to like them. But to a certain extent, the current
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  Speaker 1: market structure is has what they call out of protection
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  Speaker 1: rules of forced exchanges to route UM to the various
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  Speaker 1: exchanges and the speed bump that i X has and
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  Speaker 1: what I'm assuming will be multiple speed bumps. If I
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  Speaker 1: e X is successful, I think you'll wind up seeing
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  Speaker 1: multiple speed bumps and variations. Just to certain extent, the
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  Speaker 1: speed bump makes it more difficult for machines to find
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  Speaker 1: what the right prices. So if you know one price
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  Speaker 1: is delayed um and everything else is in real time,
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  Speaker 1: you're kind of comparing apples to orange is um comparing
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  Speaker 1: the price of an asset the way it was microseconds
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  Speaker 1: to what what everybody else is displaying today? And while
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  Speaker 1: tiny microsoconds isn't a long time at all, machines thinking
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  Speaker 1: much quicker time frames these days. So it becomes really
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  Speaker 1: a bit challenging for the machines to find the right quote.
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  Speaker 1: And that would be even more especially true if multiple
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  Speaker 1: speed bumps are developed. Alarright, could you just step back
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  Speaker 1: for a second and explain how high frequency trading works
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  Speaker 1: in connection with picking off limit orders and what are
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  Speaker 1: limit orders for those that are not in the weeds
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  Speaker 1: with this, Yeah, limit order is is just you know,
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  Speaker 1: the desire to buy a product at a certain price.
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  Speaker 1: So you see a quote in the marketplace, um, and
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  Speaker 1: the quotes that you see I'll buy a ten and
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  Speaker 1: sell it ten on one, those are basically limit orders
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  Speaker 1: or quotes UM, and so uh, generally, what high frequency
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  Speaker 1: traders it's harder to find high frequency traders, but a
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  Speaker 1: lot of the quotes are created by market makers which
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  Speaker 1: tend to use high frequency trading infrastructure, are very fast
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  Speaker 1: infrastructure to quote because um, when they're managing quotes, you
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  Speaker 1: know they can there there are twelve and soon to
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  Speaker 1: be thirteen exchanges and so um to make sure that
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  Speaker 1: their quotes are you know, precisely on target. They have
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  Speaker 1: to basically manage them very closely. And so if they're
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  Speaker 1: a bit slow on updating that quote, another person with
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  Speaker 1: very fast technology can come in and take out that price.
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  Speaker 1: It possibly the wrong price that they are, a price
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  Speaker 1: that they didn't want to really trade at. So it's
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  Speaker 1: benefits James battling machines basically well, and of course we
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  Speaker 1: just had a guest on just in I guess the
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  Speaker 1: last couple of days. I believe it was John Manley
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  Speaker 1: Pam from from Wells Fargo and him asked him about
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  Speaker 1: high frequency trading and he said, at the end of
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  Speaker 1: the day for him is and he's the big big
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  Speaker 1: money manage the billions under management that this is or yeah,
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  Speaker 1: a lot of money, right, a quarter of a trillion.
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  Speaker 1: That is that at the end of the day, they
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  Speaker 1: manage money, they manage investments, and but at the end
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  Speaker 1: of the year, it probably doesn't make too much difference
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  Speaker 1: to their customers or their portfolios. The high frequency trading,
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  Speaker 1: So who does it potentially? Uh, Who's who's it bad for?
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  Speaker 1: The challenge becomes, well, first all it's it's becomes problematic
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  Speaker 1: for the larger investor because to certain extent the markets
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  Speaker 1: are geared towards smaller orders because of the fragmented exchange infrastructure, uh,
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  Speaker 1: and the very tight quotes and are the type prices
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  Speaker 1: and quick quote um A, once you get out of
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  Speaker 1: a certain range, it's supplying you know, the price moves.
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  Speaker 1: So if you're entering the market too strongly, it'll move
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  Speaker 1: the price. And that generally occurs with folks that are
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  Speaker 1: trading in larger size. So the second issue is that,
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  Speaker 1: um the people who turn over their portfolio have much
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  Speaker 1: more to lose. So if I'm you know, if I
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  Speaker 1: if I've got a quarter of a trillions, I've got
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  Speaker 1: two hundred fifty trillion, let's just say billion assets under management,
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  Speaker 1: and my turnovers once a year all the two fifty Basically,
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  Speaker 1: I'm only you know, my leakage to high frequency trading
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  Speaker 1: only occurs, you know, you know once a year when
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  Speaker 1: I trade. If I'm turning over my portfolio twice a year,
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  Speaker 1: then it happens twice monthly, twelve times daily, two fifty times.
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  Speaker 1: So clearly the people have the most to lose of
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  Speaker 1: the people with the highest amounts of turnover. And we're
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  Speaker 1: starting to see those guys invest in um much, you know,
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  Speaker 1: in more trading infrastructure and technology and data and the
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  Speaker 1: tools of services that helped them. But there is a
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  Speaker 1: need for something like i X for the larger investors
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  Speaker 1: so that they can come in and and trade in
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  Speaker 1: larger size. The problem is that you're holding one exchange
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  Speaker 1: to a very different standard than you're holding all the
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  Speaker 1: other exchanges. And if you wind up, you know, holding
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  Speaker 1: everybody at you know, at the same level you wind up,
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  Speaker 1: you know, you can wind up with a ten twelve
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  Speaker 1: different speed bumps, in which case it's really it becomes
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  Speaker 1: much more difficult to determine what's the right price because
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  Speaker 1: every every price you're seeing is somewhat delayed, and so
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  Speaker 1: it won't be the large exchanges that wind up doing this.
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  Speaker 1: It will be like there are twelve exchanges. It's to
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  Speaker 1: be thirteen. You might see like the bottom four or
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  Speaker 1: five you know, directly create speed bumps, and maybe the
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  Speaker 1: bigger ones, you know, um use some sort of order
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  Speaker 1: type that goes over speed bumps. So in Canada there's
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  Speaker 1: a market called Neo that that only certain order types
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  Speaker 1: go over the speed bump. It's only certain order types down.
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  Speaker 1: So you might see something like that occur on some
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  Speaker 1: of the bigger markets. So you know, you've got to
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  Speaker 1: you know, so that the question will be is what
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  Speaker 1: will the SEC allow if a number of copycaps come in?
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  Speaker 1: You know, how complicated does it get? How do I
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  Speaker 1: find the best price? And clearly if if if the
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  Speaker 1: pricing mechanism becomes more difficult to determine that you know,
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  Speaker 1: the you know, the smaller orders will will get hurt
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  Speaker 1: the most because spreads are wide and because you know,
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  Speaker 1: they're not really sure how type the price should be.
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  Speaker 1: Is this a response to market volatility? Not saying that's
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  Speaker 1: the correct response, but is that really what this is all? No, No,
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  Speaker 1: it really is actually a needed response. The problem is
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  Speaker 1: the is the seces Reaga n MS tries to create
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  Speaker 1: a youth MS. Reagan MS is the National Market Structure
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  Speaker 1: rules that were created two thousand five, two thousand and six,
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  Speaker 1: I think the implemented two thousand and seven UM that
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  Speaker 1: basically UH created something called order protection, which basically says,
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  Speaker 1: if you send your order to a market that doesn't
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  Speaker 1: have the best price, the exchange that routed to the
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  Speaker 1: market with the better price. And the problem with that
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  Speaker 1: is it creates a market structure that becomes very fast
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  Speaker 1: and and there's all this order routing and you know,
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  Speaker 1: going on behind so so right now on peak days
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  Speaker 1: there are millions of messages going on, very hard to manage,
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  Speaker 1: and to certain extent, it's all this interconnection that kind
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  Speaker 1: of gets challenged. Thanks for connecting the dots for us.
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  Speaker 1: So Larry tab is the chief executive and the founder
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  Speaker 1: of TAB Group, giving us some details about I e X,
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  Speaker 1: the new stock exchange. You're listening to taking Stock. I'm
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  Speaker 1: pim Fox my co host Kathleen Hayes. This is Bloomberg Radio.