NEW YORK, June 4 Electronic trading firms that call themselves market makers should be held to strict market-making standards that ensure their style of high-frequency trading is adding value to markets, Virtu Financial's chief executive officer said on Wednesday.
Market makers should be obligated to quote at or near the inside of the national best bid and offer throughout the day, quote at various price points in a number of different securities and put real capital at risk, said Douglas Cifu, chief executive officer of Virtu at an industry conference held by Sandler O'Neill + Partners.
High-frequency trading (HFT) has been under intense scrutiny over the past couple of months following the release of Michael Lewis's book, "Flash Boys: A Wall Street Revolt." Lewis claims the U.S. stock market is rigged, with exchanges and alternative trading platforms favoring HFT firms, which use their speed advantage to extract billions from the financial market.
HFT is carried out by many banks and proprietary trading firms using sophisticated computer programs to send high volumes of orders into the market, executing a small portion of them when opportunities arise to capitalize on price imbalances, or to make markets. The practice makes up around half of all U.S. trading volume.
Virtu is one of the largest HFT firms and acts as a market maker in several different assets and geographies, taking the other sides of trades and making money off of the bid-ask spread. The firm put its initial public offering on hold indefinitely in April as the debate around the value of HFT grew following the release of "Flash Boys."
Obligating market makers to maintain standards would help market participants distinguish between liquidity-providing HFT and other types of trading that might not provide as much value to the market, Cifu said.
"Clearly there needs to be a simplification of the understanding of the market and selfishly I think market standards are a big part of that," Cifu said.
Brad Katsuyama, chief executive officer of IEX, a new alternative trading system featured in "Flash Boys" that has made efforts to keep what it sees as harmful HFT at bay through electronic "speed bumps" and has ambitions to become a full-fledged exchange, agreed.
"Not all HFT is bad," he said at the conference, adding that obligations for market makers would help make the markets more transparent. Virtu makes markets on IEX.
Federal U.S. investigators and regulators have said they are looking into possible wrongdoing by HFT firms and New York state's Attorney General said he believes exchanges and other platforms provide HFT firms with unfair advantages. (Reporting by John McCrank; Editing by Cynthia Osterman)