SEC should reconsider Reg NMS to Fix HFT liquidity problems

Tuesday's mini tech flash crash and SECS upcoming report on causes and corrections of the May 6 market flash crash has a high-frequency trading and market structure issues back in the headlines. Bloomberg Reuters lead markets & finance article in this week's issue titled "Missing: The stock market, buyers of Last Resort" argue that move away from THE NYSE specialist has eliminated the only major source of liquidity during the tumultuous markets. (Some smart writers gone, sounds much like T3Live's article published in this week's advanced Trading magazine with the title "A bad model: relying on High Frequency Traders as liquidity providers".)
A primary solution of liquidity problem is to reconsider the Reg NMS and, in particular, set aside the order protection (or trade) article.
What is Reg NMS and Article 611?
THE SEC describes regulation national market system (NMS) as "a series of initiatives to modernize and strengthen the national system of equity securities."Legislation adopted in 2005 and which is intended to reduce costs and promote justice for all competitors in the financial markets. Rule 611 of regulation was to protect the article mainly to prioritize to limit orders on the inside market. This rule makes it impossible to pay through the market and forced entries to be included in quotations on the inside market.

Order protection rule has been controversial since its passage, some argue that it is forcing retailers to run on any slow or unreliable venues only because the site offers the best price quote Trader may nevertheless like. to pay a slightly higher price of execution is faster, more reliable, or of a larger size. Second, the rule of right forces brokers to act in the best interests of its clients.Other remains of the view that the rule did not go far enough.
What caused the Reg NMS?
While Reg NMS was with good intentions, the subsequent consequences say caused increased fragmentation of markets and very unreliable order books; Rule Direktrespons explosion of so-called "footprint discovery" high-frequency trading firms to evaluate entries to find larger players and take advantage of its intention to buy or sell. Large companies have responded buyside in kind.
First, the buyside firms invested heavily in the algorithm equipment to protect their order flow from opportunistic HFT looks to take advantage of their relatively large and slow client limit orders. These companies have other took their order flow of so-called enlightened markets and moved it to dark markets; These dark pools allows large institutions for trade blocks with each other without displaying the liquidity on public order books.Dark pool transactions, over-the-counter and represents the exact type of market fragmentation Reg NMS was intended to remedy.
Trade by article has inadvertently forced large buyside firms to present their intentions by first driving on the inside market. So, 100 shares posted inside the market need to be transferred with the first rather than perhaps the 5,000 shares behind. for greater institutions, offers 100 shares likely posted by a market maker ultra-fast HFT computers is a minor peak, but peaked yet to buyer's intentions. Yet, this tip in my hand, occurs with no benefit to the Department as proportion of 100 entirely fill is not important whether the order is for influence of 20,000 shares; it is not difficult to guess what happens next, liquidity posted behind to order immediately disappears.
Passage of Reg NMS done unintentionally markets much less liquid and quotes a lot less reliable.The extremely high quote cancellation that is a direct result of HFT enterprises adapt to the footsteps of the great players are authorized to do by confirmed carries out small, inconsequential orders on the inside on the market before you are allowed to access the orders of substantial size that sit behind.(Previously we have advocated for cancellation tax fix the problem), the decline in order fill mainly effects latency arbitrage opportunities for HFT. HFTs is faster and can cancel before the buyer can buy them.
Knowledge about this rule has also allowed the nefarious traders manipulate stock inventory orders book outside of the inside market.The trader does not intend to receive a fill and will back away if he thinks he can be filled, but he uses disproportionately large orders moment outside the internal market has been artificially support a share or drive.
Flash crash was a direct consequence of false liquidity at the market isolated by order protection rule.While it may have been visible orders over stocks and markets, minute large-scale sales-page volume began to beat the band, the supposed liquidity disappeared as HFTs support from their tenders.Imbalance at the sales page is immediately and offers all available for download at a time.All this happens almost instantly causes lightning falls in shares of stocks; And it should be recognized that these are not isolated events, and they will continue to be governed by current regulation and market structure.
How to fix Reg NMS?
Rule 611 of Regulation NMS should be repealed, inability to pay through the inside market has removed any incentive to sit outside the internal market with a block of liquidity, the forces retailers to pay small players who create a tighter inside spread. yet, the "real" spread in terms of significant, reliable liquidity may be a few cents on each side; inability to simultaneously execute orders via internal market allows to store inventory and HFTs then quickly stops at the first transaction.
Relaxing for protection article would allow traders to go after the real amount of liquidity in the market and force greater reliability of orders that are placed outside from the inside While the objective market. to allow real estate agents have their clients ' interests at heart when carrying out orders are certainly valid, does Article 611 unexpectedly corrupted overall market efficiency; the objective for each market reform should be to reduce fragmentation and get reliable liquidity back to enlightened markets; repealing Article 611 would do both.

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