Jeff  Carter

There was a couple of hearings yesterday on Capitol Hill. One was on High Frequency Trading and how it’s defined. Joe Saluzzi is on the panel that is making the definition up. As my long time trader friends have told me, they know something in the marketplace is wrong, but no one with any sort of power is doing anything about it.

Case in point, yesterday in the Lean Hogs ($HE_F), we had a split second flash crash. If you were on Stocktwits, I tweeted it at 12:57 ET. The mini crash happened around 12:53. The July contract broke from 95.30 to 94.57 in a blink and back up again to 95.17. That’s not good for markets and it is an open question how electronic trading should interface with small agricultural markets. Certainly there is a major role that should be played, but we need some Walt Disney Imagineering. The way it works today will slowly strangle the market.

These sorts of things happen every day. One of the reasons why on the cash equity side of the business is decimalization. Because stocks are trading in pennies, there are plenty of opportunities for middlemen to front run the public and pick up a few cents on every trade. All of this is legal because the SEC allows it through internalization, dark pools, and payment for order flow.

Regulators are worried that customers won’t understand the change. They are worried already fragile confidence in markets will be shattered. The reason the general public doesn’t trust the marketplace is because they know its stacked against them.

For those that don’t understand why a nickle spread is better than a penny spread, here is a primer.

Since the market has gone from trading in eighths, or .125, to pennies, those of us that trade it every day have found that there isn’t as much volume traded on each price. This means that markets are thinner. As the market has transitioned from a human interaction marketplace to an electronic market place, the amount of “size” or volume on each bid and offer is less.

Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.