Wall Street's Problem

Is the stock market rigged?

This is the hot-button question of the day. With all due respect, it's a stupid question. It's a stupid question for which the answer doesn't even matter.

But just for kicks, lets examine the question anyway. Let's consider for a minute that the following scenario is what people are fixated on: a trader is looking at an offer to sell 10,000 shares of Intel. The trader sends an order to buy those 10,000 shares but only gets back 4,000 shares.

Does that mean the market is rigged? That's a stupid question.

Did the broker route poorly, not understanding market complexity? Certainly.

Does it APPEAR to be rigged? Almost definitely.

Does it matter which is true? Not in the slightest!

If the problem is simply one of optics and perception, it's just as much a problem as if the market IS rigged. Capitalism only survives by the confidence of the public and this confidence has been waning since 2000. Every few years, there's another bubble and another scandal and it's a terrible, terrible problem. When the answer to whether the market is rigged is incomprehensible to 99.9% of the public ("Well, due to geographic dispersion and the differential between co-located servers receiving direct market data feeds over a 10 gigabit per second cross connect, versus your broker's order transiting slower fiber optic cables blah blah blah blah"), then the market may as well be rigged.

Is the stock market rigged?

If your answer is that it's not as rigged as it used to be, then you are automatically disqualified from further comment on the subject. If your answer is that the market has never been better, your platitudes are not supported by any transparent, independent or quantitative evidence. In reality, the answer should be obvious. There should be an open, public dataset that we can point to that conclusively demonstrates that markets are working better than they have been. There isn't.

Is the stock market rigged?

When "dark pools" are opaque not only from a price discovery perspective, but also from a regulatory filings perspective, it's no wonder Michael Lewis characterizes them as sinister in his new HFT thriller. It's disturbing that the operational details, matching mechanisms, access offerings and fee schedules for dark pools aren't public. It's absurd that we have to speculate as to whether broker-operated dark pools are skimming small sums of money away from their clients because they are matching midpoint orders based on stale market prices (Read: We don't really have to speculate - they are). Is the term "Dark Pool" sinister? Yes. Do they deserve that characterization? From a certain perspective, yes. There's no transparency into them, so an author who wants to tell a dramatic story has the freedom to do so.

Is the stock market rigged?

When Bill O'Brien, the President of BATS, browbeats a polite Canadian with the assurance that the market isn't rigged, he's not helping his case. Perhaps it's unfair to pick on Bill? But this is the age of social media, where no visible deed goes unpunished. As O'Brien's defensive diatribe goes viral, it simply confirms what most Americans already assume.

Even Commissioner Dan Gallagher of the SEC agrees, "the problem with high-frequency trading right now is that there's a perception that for the little guy, the markets aren't fair, that perception to me is a reality. It's something we need to address."

Is the stock market rigged?

It doesn't matter. What matters is how incredibly out of touch Wall Street has become with the average American. What matters is how incomprehensible the system has become to anyone outside a small group that specializes in something called Market Structure. What matters is that the answer to this question isn't clear. Rigged is a loaded term, and can mean many different things. We don't think the market is rigged like your average casino. But we also question if brokers are acting in their clients' best interests. It's hard to say whether this is due more to the fact that they aren't legally compelled to or the fact that their bonuses incentivize them not to. Either way, Wall Street has a problem. We don't care what word you use to describe it.

This is why we are excited to announce a new initiative called Healthy Markets, a group whose only goal is to restore trust in the financial services industry. Our focus is transparency, reducing conflicts-of-interest, and incentivizing displayed liquidity of different timescales - high-frequency and otherwise. The world of computerized trading is here to stay but we can do a much better job writing the rules to make it fair and trustworthy again. Let's get started!