High Frequency Debate Influences Survey on Stock Market Fairness

The intense debate over high-frequency trading spurred by a best selling book and regulatory investigations has begun to affect the sentiment of institutional investors as a new poll demonstrates.

Over two-thirds, 70 percent, of financial services participants believe that U.S. equity markets are unfair and that HFT is harmful, according to a survey conducted by ConvergEx Group LLC, the global agency broker, released yesterday.

Only 18% of the participants said that U.S. equity markets were fair, while 11% indicated they didn’t know. The results reflect the negative way in which Wall Street has been portrayed in Michael Lewis’ book “Flash Boys,” published on March 31, which contends that high-frequency traders are scalping institutional orders through tactics such as latency arbitrage and access to proprietary data feeds and colocation services to get an unfair advantage over other investors. An investigation by Attorney General Eric Schneiderman into HFT firms also ignited concerns, while the SEC Chairman White has said that HFT is a primary focus as well.

The ConvergEx survey is based on 357 respondents, of which 233 work on the buy-side including mutual funds and hedge funds, 73 work at sell-side firms or banks and four who are at exchange operators. ConvergEx conducted the survey from April 16 to 21, and has a margin of error of plus or minus 10 points.

ConvergEx’s customers are primarily large institutional investors who represent pension funds and mutual funds. More than half of the participants, 51%, said HFT was either harmful or very harmful to U.S. equity markets.

“What may be surprising, however, is that most people seem to be taking a wait-and-see posture,” commented Eric Noll, president and CEO of ConvergEx Groups, in a letter introducing the survey. “Very few respondents to our survey have made any changes recently to the way they interact with the markets and the majority feel that regulatory changes can provide answers.”

Despite the negative sentiment, the survey revealed that two thirds or 71% of participants have not made any changes to the way they interact with the U.S. equity markets. Twenty percent said they made slight changes, while only 2% said they made significant changes.

In total, 43% of the participants are looking to more regulation for the U.S. equity markets to resolve any flaws in the market structure. Less than 40 % said there should be the same amount of regulation, while 19% would like to see less regulation.

ConvergEx’s Noll told Bloomberg News that its buy side customers view make-or taker pricing as a “flawed incentive system,” suggesting this is one of the key areas that needs to be addressed.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio