Bloomberg View published an op-ed today titled  “High-Speed Trading Is Progress, Not Piracy” written by Professor Bernard Donefer of Baruch College. As expected, this is the typical HFT defense piece (why does Fred Mishkin come to mind every time we read an academic piece like this). We’ll save you the trouble of reading it and summarize Prof. Donefer’s main points:

- Criticism of HFT is overblown
- Information-timing asymmetries have always existed
- Automated market makers are liquidity providers
- There is some bad HFT (momentum ignition, layering) and this needs to be identified but don’t blame all HFT.
- Credit Suisse (the largest dark pool provider) published a study that shows volatility is down and spreads are tight.

Does every HFT defender simply reference the same old tired talking points? There must be an app somewhere that spits out these standard lines. While Professor Donefer stuck to script and hit all the talking points that the FIA/PTG would have liked him to hit, he has overlooked most of the structural issues that allow HFT to extract near risk free rents from the markets. He does not address:

-the fact that there are two separate quotes (the fast one that HFT calculates, and the slow one that the SIP provides)
-why are there 13 different stock exchanges
-the maker/taker model and the payment for order flow which has distorted asset pricing
-the conflicted order types like hide/slide and Day ISO
-the conflicted smart order routers
-the IOI’s that dark pools send to each other
-the poorly crafted regulations like Reg ATS and Reg NMS which helped create today’s fragmented market

Professor, these are the real issues. We all know that you can’t stop technology and we have no intention of trying to do so. But please, it’s time for some new defenses.

We must give the professor some credit though. At the end of his pro-HFT piece, he does make some very good recommendations for structural reforms (Interesting that even though he thinks there is nothing wrong with HFT, he feels the need to call for structural reforms). He states:

We should consider creating new trading venues exclusive to institutional block investors, and perhaps allowing block traders to opt out of the SEC’s trade-through rule, which requires buying shares at the best available price, even when that’s a hindrance to large trades. A new call market limited to small and mid-cap stocks might increase liquidity and tighten spreads for stocks with low average daily volume.”

These are all excellent recommendations that would help bring back trust and confidence to the equity market. Addressing the needs of small and mid-cap companies separately is also the right approach since their needs are much different from the mega cap companies.

We are not in favor of new regulations for the sake of regulation. We are in favor of having the stock market serve its original purpose of helping companies raise capital so that they can grow and create jobs to help our economy grow.



Joseph Saluzzi ( and Sal L. Arnuk ( are co-heads of the equity trading desk at Themis Trading LLC (, an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.


UPDATE: April 18, 2012

Last week we posted a comment titled ”The HFT Pirates and Their Academic Friends.” The piece was a rebuttal to a Bloomberg View article written by Professor Bernard Donefer. We spoke with Professor Donefer via email exchange after this post. He took exception to being likened to Fred Mishkin – i.e. academia for hire. The exact line we wrote was “As expected, this is the typical HFT defense piece (why does Fred Mishkin come to mind every time we read an academic piece like this). Professor Donefer made it clear that he was asked to write this editorial BY BLOOMBERG, and that he IS NOT in the employ of any HFT firm, and that he remains independent. He feels that associating him with Fred Mishkin is inappropriate. We agree that the comment likening his editorial to Mishkin was strong, and unprofessional. We regret making that reference.

Category: Regulation, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “HFT Pirates And Their Academic Friends”

  1. Eurosharelab says:

    Thanks for the summary.

    Its probably time that all academics, scientists and universities be subject to the similar disclosure as analysts.

    Saying how much they or their universities received from companies related to their papers or research over the past 3 to 5 years.

    Just look at the climate change junk science mess…

  2. Moe says:

    We need a Betty Ford clinic for HFT Traders

  3. VennData says:

    This is just one in a series of occupations formerly done by people, better down by computers.

  4. mathman says:

    Speaking of pirates:

    “Even in the bitterest partisan times, ocean issues tend to exist outside the traditional political boxing ring. They usually foster alliances based far more on geography than on party affiliation. Members who represent coastal states and districts usually recognize the value of sustaining and investing in our valuable ocean resources, and they prioritize them more than their inland counterparts. But in recent months the escalation of rancor and polarization encompassed even the normally temperate issue of ocean policy.

    Nowhere is this tone more prevalent that in the House Committee on Natural Resources, where Republicans have made President Barack Obama’s National Ocean Policy public enemy number one.

    Ever since its roll-out, the policy—implemented by an executive order in 2010 to provide a comprehensive set of guiding principles for the “stewardship of the ocean, our coasts, and the Great Lakes”—has been taking fire from opponents who cite it as an overreach that would spawn “job-killing regulations,” according to Rep. Doc Hastings (R-WA) and would mean the “death of all land-use planning” in this country, in the words of Rep. Tom McClintock (R-CA).

    Leaving aside the inherent contradiction espoused by Rep. McClintock—that the National Ocean Policy’s nefarious efforts to develop a framework for the great evil of ocean-use planning would in turn kill the wonderful benefits of land-use planning—boiling these statements down to their roots leaves little more than bald political rhetoric. In practice, the policy will improve scientific management and will help safeguard the commercial and recreational fishing industries—some of the most fundamental drivers of our ocean economy.

    Rep. Hastings, who chairs the Committee on Natural Resources, and Rep. McClintock both hail from coastal states, yet neither of the regions they represent in Congress actually touch the Pacific Ocean. Still, the rivers that run through their districts ultimately terminate in the sea, and new findings are proving regularly what we already knew—what enters those rivers flushes into the ocean and directly affects all facets of marine life, including our fisheries.

    Rep. Hastings has held multiple hearings about the National Ocean Policy in his committee this year, repeatedly questioning administration officials, scientists, industry members, and advocates about what he sees as an authoritarian overreach and a prime example of the regulatory stranglehold the Obama administration is putting on America’s economic growth. (I testified before Rep. Hastings’s Committee on October 29, 2011.)

    On April 2 Rep. Hastings sent a letter to his colleagues in the House Appropriations Committee—the holders of the congressional purse strings—asking them to “prohibit the use of funds for the implementation of the National Ocean Policy.”

    On the whole, many fishing industry groups, including the regional fishery management councils tasked with developing fishery management plans, have expressed concern over the policy since its inception because they feared their voices would not be heard during the development of specific policy recommendations. Since the initial proposal was announced, the administration has taken steps to alleviate those concerns, including formally incorporating the councils in regional planning efforts.

    Despite these improvements, Rep. Hastings has been joined in his effort to defund the policy by a coalition of ocean and inland industry groups, including commercial and recreational fishing organizations. In their letter the groups call out potential benefits of a national ocean policy “designed to stimulate job creation and economic growth while conserving the natural resources and marine habitat of our oceans and coastal regions.” Then, in the next sentence, they contradict this desire by calling for a “pause in implementation” of President Obama’s ocean policy, which explicitly shares those goals.

    In this letter Rep. Hastings also says the policy is “especially alarming” because it “stretches far inland following rivers and their tributaries upstream for hundreds of miles.”

    But of course it stretches upstream! There is no impermeable layer dividing salt water from fresh. This is a fundamental reason why we need the policy in the first place. In fact, the policy is designed specifically to ensure adequate and efficient coordination between the agencies responsible for inland activities that affect ocean resources and the agencies that oversee the ocean activities themselves.

    The news this week provided specific examples of why such coordination is necessary. Pesticide use was found to affect Pacific salmon populations, and ocean acidification was proven to stunt oyster growth. These may seem like obvious conclusions to draw, but they both exemplify the difficulty in differentiating between oceans and lands. Similar to the estuarine boundary between salt water and fresh (how salty can fresh water be before it becomes seawater?) our jurisdictional boundaries are equally nebulous.”

    (there’s more)

  5. louiswi says:

    I’d like to hear an argument as to why HFT is NOT a criminal activity. Could someone provide that side of the argument please?

  6. theexpertisin says:

    President Obama cautions against a Las Vegas mentaliity, railing until recently about corporations blowing money away on the Strip.Bernanke rigs the system so income investors are pushed to go into the HTF nest to chase a decent yield.

    FBI agents are throwing careers away because they don’t want to pay the extra $45 to a Columbian hooker and Hillary guzzles down a beer, dancing the night away in, of all places, the Habana Club – while President Obama continues to stiff Cuba at the OAS meetings and throws another few billion away on US bases in Columbia to stifle a dying dictator in Venezuela.

    Facts are sometimes stranger than fiction.

  7. dead hobo says:

    louiswi Says:
    April 16th, 2012 at 11:10 am

    I’d like to hear an argument as to why HFT is NOT a criminal activity. Could someone provide that side of the argument please?

    Saying all HFT is criminal is like saying vending machines are criminal because they shut down small business in a variety of nefarious ways.

    Like it or not, innovations occur. In the case of HFT, this innovation has been used for abusive trading practices primarily because regulators are ignorant, corrupt, and lazy.

    This being said, since it appears there are a lot of competitive HFT algos flashing away on a constant basis regarding almost everything that can be used for investment, it might be said that model of perfect competition has driven the cost from HFT down to almost the normal cost of business. Removing some HFT abuse would make it in the aggregate less likely to provide an offset for some other abusive behavior and raise the direct and indirect cost on investing. In other words, abuse A creates an opportunity for offsetting abuse B; both of which cancel each other out. While not even close to perfect, this might be the best regulation we can get.

    Besides HFT has become a poster child red herring. The ocean of cash directed towards commodities eliminated the need for buyers to demand lower prices since most buyers profit from rising costs due to financial innovation in commodity trading. This is just the opposite of the textbook trading model. Most of wall street is dumb beyond belief and still thinks that rising commodity prices are a benefit to the economy.

  8. eliz says:

    In my world it is time to eliminate the publicly held corporation model and send the entire equity market packing. You “vant” to gamble? Head to Vegas, Atlantic City, Monte Carlo, or an Indian casino – etc.

  9. ToNYC says:

    Since Nixon and Rumsfeld, Science has been hijacked by Corporatism. The EPA was Nixon’s way of removing science from the ordinary life experience….soon the DEA and later DHS added mortar to his bricks. Universities collect talent and get credit for simply not ruining the wonderful and natural physical contact form-factor result of thoughtful concentration and analysis. Otherwise they’d be content to write continuously new editions to old subjects and charge hundreds of dollars for the pretense, medieval as that may be in the digital age.

  10. ConscienceofaConservative says:

    At the end of the day, if more people come to accept that the information is rigged(pardon i mean asymetric), they will vote and leave much as someone boycots a rigged casino. HFT cannot exist without actual investors to pick off. We’re really messing with the secret sauce that fueled this nations success.

  11. ben22 says:

    And here’s the other side of Joe Saluzzi’s points, he even gets a mention by name in this interview:

    “Detractors who claim that HFT causes volatility or price impact (for example, Joe Saluzzi of Themis who has repeatedly claimed on television that HFTs are responsible for driving stock prices higher since March 2009) are either ignorant or deliberately deceptive. A trader who starts and ends each day with no positions can not materially impact the price of stocks – the positive impact of their buy trades is exactly canceled by the negative impact of their sell trades. You’d have to engage in some serious contortions of logic to argue otherwise.”

    I’m no expert in this area, not by a long shot, but the simple observation is that those making the most noise about the evils of HFT are the one’s that lost business because of them.

  12. Blissex says:

    «Automated market makers are liquidity providers»

    J. K. Galbraith, “The Great Crash 1929″, page 48:

    «The purpose is to accomodate speculators and facilitate speculation. But the purposes cannot be admitted. If Wall Street confessed this purpose, many thousands of moral men and women would have no choice but to condemn it for nurturing an evil thing and calling for reform.

    Margin trading must be defended not on the grounds that it efficiently and ingeniously assists the speculator, but that it encourages the extra trading which changes a thin and anemic market into a thick and healthy one.»

  13. hidflect says:

    There’s been a steady rotting out of objectivity in science and academia as the Corporate funded, economic value of tenure has corrupted research and study into a semi-papal type of group-think. Not many people will risk their children’s private education to be “bold” and suggest non-corporate theology.

  14. Marketwatcher says:

    Perhaps those academics who study markets closely actually know something about how they operate. Bernard Donefur was one of the few academics who raised warnings about flash-crash-like instability BEFORE the flash crash. If anyone has credibility in this space, it is Bernard Donefur. Just because his findings differ from your economically-biased prejudices does not make him bad.