Some veteran traders slammed the deep fragmentation and high trading speeds that dominate U.S. equity markets on Wednesday, with one saying that buy and sell orders are regularly "gamed."
The traders were speaking at a Securities and Exchange Commission forum on the rise of high-frequency trading and the 700-point plunge in the Dow Jones Industrial Average on May 6, which many people call the flash crash.
"Market structure like this guaranteed that a flash crash would happen, it was only a question of when," said Richard Rosenblatt, who has executed trades for institutional investors since the 1970s. He called the incident "embarrassing."
"It shook confidence in our markets and it was avoidable," Rosenblatt said. "The clear culprit was a commitment to high speeds whether it made sense or not."
Some traders defended today's mostly electronic marketplace, while others slammed it. The difference of opinion represents a fissure between what must be done to mend public confidence after the May 6 crash.
High-frequency traders use lightning-quick algorithms to make markets and earn thin profits from tiny imbalances. Some critics have said they put long-term, retail investors at a permanent disadvantage.
The SEC summoned trading experts to help peel back layers of the complicated marketplace after the event confirmed some long-held concerns over its stability.
SEC Chairman Mary Schapiro said regulators were making progress in reviewing the crash, but did not say whether they were any closer to identifying the cause.
Regulators and some lawmakers are questioning the fairness and stability of the high-tech U.S. marketplace, where some 50 electronic trading venues compete for ever faster and heavier order flow.
Diamond Hill Investments Director Stephen Sachs said competition is good, but "we have clearly reached a point where this fragmentation is creating significant issues."
"We have created an environment that is far more difficult to navigate," he said.
The SEC roundtable, conceived earlier this year, comes as the regulator digests more than 200 letters in response to its wide-ranging paper on trading and market structure.
The "concept release," which asked several questions about high-frequency trading, was published in January in response to concerns building through 2009 over the fairness and stability of U.S. equity markets.
"Today it is very difficult to say that there are not subsegments of this market that are taking advantage of us. They use strategies that are trying to game what we're doing," said Kevin Cronin, director of equity trading at Invesco, an asset management firm.
Some traders defended what they do.
Gus Sauter, chief investment officer of fund giant Vanguard Group, told the SEC that these traders reduced trading costs for investors over the past few years and now help to "knit the very fragmented marketplace together."
Lime Brokerage President Jeffrey Wecker said high-frequency traders are subject to "misplaced vilification."
Regulators and exchanges have tried to temper expectations that a single cause of the flash crash would emerge, instead highlighting proposals including new circuit breakers to pause trading and clear rules for breaking trades.
Other changes could come, such as saddling high-frequency traders with commitments to trade and cracking down on anonymous trading venues known as dark pools.
"We need to work on incentivizing firms to really step up and commit capital over a duration, and the only way to do that is really through credits and incentives," Christopher Nagy, head of order routing at online broker TD Ameritrade Holding Corp, told the panel.
SEC Commissioner Luis Aguilar raised concerns that the bulk of roundtable participants were from the financial services industry.
A series of regulatory changes over the last decade contributed to the proliferation of alternative, non-exchange trading venues in the United States, as well as the reliance on computerized high-frequency trading to ensure that there is enough liquidity to keep markets flowing.
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