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 (NDAQ.O), 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 (FB.O) 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)