(Adds details from CEO interview and conference call,
background on market structure debate)
By John McCrank
April 24 Author Michael Lewis' claim that the
U.S. stock market is rigged was "irresponsible," but the debate
it has sparked could lead to positive change, said Bob Greifeld,
chief executive of Nasdaq OMX Group, which reported
higher earnings on Thursday.
In "Flash Boys: A Wall Street Revolt," Lewis says that
high-speed traders bilk billions from the financial system using
ultra-fast telecommunications links, microwave towers and
special access to exchanges to gain an edge over other traders.
"I think certainly it was an irresponsible piece of work and
it served to tell a story without any research or factual
checking of what was going on and I think it did a disservice to
the industry," Greifeld said in an interview.
The debate over the fairness of the markets and the role of
high-speed traders is not new, but Lewis took it mainstream.
Shortly before "Flash Boys" was released in late March, New York
Attorney General Eric Schneiderman said U.S. stock exchanges and
alternative trading platforms provide high-frequency traders
(HFTs) with unfair technological advantages that give them early
access to key data.
Schneiderman said he had begun meeting with exchanges and
alternative trading venues, known as dark pools, to discuss
reforms. Last week, Reuters learned that his office had sent
subpoenas to at least half-a-dozen HFT firms seeking information
on their relationships with exchanges.
Nasdaq has not been subpoenaed, Greifeld said.
The U.S. Securities and Exchange Commission, the Commodity
Futures Trading Commission and the Federal Bureau of
Investigation have said they had several active probes into HFT.
HFT AND MARKET MAKERS
There is no agreed upon definition of HFT, but Nasdaq said
on Thursday firms it considers to fit into the category add only
1 percent to its total revenues. The transatlantic exchange
operator said its first quarter revenue was up 27 percent from a
year earlier, at $529 million, helped by new revenue from recent
acquisitions, as well as organic growth.
Nasdaq did not include in its HFT definition firms with
market making obligations on its exchange, meaning firms that
take the other sides of trades in stocks they have been assigned
responsibility for. Several such firms are considered by HFT
critics to be among the largest high-frequency traders.
"These are people who are providing a two-sided market, who
always have to be on the adverse side of the investment
decision, providing immediate liquidity to the marketplace, and
under our rules have to be within a certain percent of the
inside market on a continuous basis," Greifeld said on a call
with analysts. "So I think in any construct you talk about,
nobody is going to try to restrict that activity. Why would you?
The market needs that."
SHINING A LIGHT ON DARK CORNERS
Nasdaq said its net income in the last quarter rose to $103
million, or 59 cents per share, from $42 million, or 25 cents
per share, a year earlier. The year-ago results were hit by
charges related to problems with Facebook Inc's initial
public offering, when a glitch on Nasdaq's exchange led to a
collective loss by market makers - which absorbed the losses of
other firms - estimated at around $500 million.
Not including one-time items, the New York-based company
earned 72 cents per share, beating the average estimate of
analysts by a penny, according to Thomson Reuters I/B/E/S.
Non-transaction-related services, such as providing market
data and public relations, made up 72 percent of Nasdaq's
revenues. Like other exchanges, Nasdaq has had to rely less on
trading revenues in recent years as nearly 40 percent of all
stock trades now happen on private broker-owned dark pools and
other off-exchange venues where trading information is hidden
until after trades are executed.
Some academics and former regulators say so much trading now
happens on "dark" venues that publicly quoted prices for stocks
on exchanges may no longer properly reflect where the market is.
And this problem could cost investors more than any shenanigans
related to high frequency trading.
Greifeld said he has been frustrated by the lack of movement
on this issue. But he added that with all of the attention
generated from "Flash Boys," he is hopeful progress will be made
toward rules that would force brokers to only route trades
off-exchange if those trades are of a certain size or could be
executed at meaningfully better prices than on a public market.
"We certainly feel increased optimism that with this
publicity, we can have maybe an acceleration of the evolution of
the market. And with 40 percent of the market trading away from
the lit markets, there is certainly great opportunity for us."
(Reporting by John McCrank in New York; Editing by Lisa Von
Ahn, Bernard Orr)