My “Aha” Moment with US Equity Electronic Trading

You have heard the expression “Conflict of Interest”.

Well, a Bay Street veteran introduced me to its iteration early in my career “Where there is no conflict there is no interest.”

Now that Michael Lewis has blown the whistle on High Frequency Trading or HFT, in yesterday’s New York Times (here) and his just released book ‘Flash Boys: A Wall Street Revolt’, my question is ‘What took so long?”

I encountered an early version electronic trading back in 1999 – 2000. We at Acker Finley Inc. (AFI) had a sizable proprietary trading desk – prop desk – trading both US and Canadian equities. Traders using AFI’s capital to make short term trading gains in the equity markets.

For US equity trades our traders were using _______ ____’s on-line equity platform. Month after month things were going swimmingly, with AFI making a tidy profit after bonuses and expenses.

Then one day one of our traders was complaining about a US equity fill he received to a _______ representative over the telephone and the conversation wasn’t polite (if you catch my drift). I made a mental note but thought nothing of it, until a few months later there was a chorus of similar complaints from the guys on AFI’s trading floor.

Just like Michael Lewis’s article I stood behind one of my traders as he placed a buy market order on the offering side of the market and as he hit ‘enter’ on his computer the market offering immediately moved upward while we waited what seemed like hours – OK minutes – with no fill as the stock gapped higher.

I couldn’t believe my eyes.

So confusingly I picked up the telephone to enquire what the #%$# (expletive) was going on. The _______ rep said the explanation was simple. He explained _______ was internally ‘restricted’ on the stock and they had to ‘trade away’. Meaning, _______ was acting on behalf of or advising the company corporately and as a market maker they gave our buy order to another firm or worse, place our order in a very low priority so as _______ would not be in any ‘conflict of interest’ situation. If the market moved against us, so be it! ( _______’s commission rates still applied by the way!)


Thinking quickly I said “OK, so every morning could you please give me a list of your ‘restricted’ stocks so we can trade somewhere else or better still NOT trade the name at all?” This seemed reasonable in that if _______ couldn’t give us the best price and speed for our orders then why risk losing money on the trade to begin with.

“That information is confidential”, snapped the rep. I guess reasoning if the public knew the stock was on _______’s ‘restricted’ list some corporate activity was in the offing potentially impacting the stock price.

“This is ridiculous”, I shouted. “ If we get a lousy fill or no fill at all, then we are to assume you are ‘restricted’ on the stock”.

“Obviously!” the rep responded without a hint of incongruity.

And after this conversation we got lousy fill after lousy fill!

So as the saying goes, I was born at night, but not last night!   We began auditing the results of our traders over the last six months and the result was jaw dropping. Our traders were making money, but only in Canada. The US equity trading was slowly and steadily losing money, albeit in small amounts, consistently and repeatedly.

_______ was swallowing a bigger spread of our trading action. The more we would have traded the more we were to potentially lose.

We pulled the plug on _______’s platform and we modified our US trading habits to recognize the US equity market’s new reality – more on this in another blog. Canadian trading always was profitable and still is. I thought over time market participants would get smart to what was going on and fix what was a clearly a broken equity trading system.

Keep in mind this occurred in early 2000 where much of the work behind the trading interface was human. Over time these human acts were coded into high-speed servers and routers and placed not only in the big investment banks but also their ‘siren’ high-speed servers where in close proximity to if not in the stock exchange buildings themselves. Yes, these big investment banks, hedge funds and specialized ‘High Frequency Traders’ have had 14 years of open-field running and probably have accrued huge profits at the expense of investors.

Finally it has taken Michael Lewis and a Canadian boy from Royal Bank of Canada, Brad Katsuyama, to finally expose what is truly going on and did something about these unsavory business practices by starting his own independent equity exchange called IEX.

The final irony for me was _______ _____ announcing in the New York Times Op-Ed page their approval and use of this new equity exchange, IEX. My guess is the predator became the victim. Others ‘Conflict of Interest’ are finally boomeranging round and affecting them and their clients. This US financial heavyweight is now in the role of a client – AFI back in 2000 – and probably grew frustrated of what others were doing to them.

If you’re in this business long enough things do come full circle – eventually!


P.S. While in the midst of writing this blog – Monday night, the FBI announced an investigation of HFT. Another investigation of Wall Street, of how clients were disadvantaged for the sake of inflated salaries and excessive profits. Sound familiar?


3 responses to “My “Aha” Moment with US Equity Electronic Trading

  1. cobbiangrant April 1, 2014 at 9:52 am

    Great read Brian! Most regular investors, folks like myself knows that there is always greed and corruption where there is opportunity for it. Most of us do not even trust the overseeing and regulatory bodies to protect us. It is most assuring to read about people that are straight up in business and make a difference for the investment community. Thanks for your insight and opening our eyes a little more!

  2. Dave April 2, 2014 at 11:27 am

    Hi Brian: I caught Charlie Rose’s interview with Michael Lewis last night on PBS. There are excerpts from the interview on You Tube at the following link This interview was on last night at 11:00 Pm and it will repeat this evening on PBS West at 5:00 Pm. (Bell HD 824)

    • ModelPrice Guy April 2, 2014 at 1:18 pm

      Thanks Dave. Wow, Mr. Lewis set-off a fire storm judging by the media interviews that he has been doing. This to me is a good thing. The lowly stock exchange, both the NYSE and the TSX, was always responsible for the protection of the buyer and seller being treated fairly in its role as a regulator as well as a stock exchange. In our rush to privatize these two exchanges, and exchanges all over the globe, the regulator role between the buyer/seller was dropped. Now these public exchanges are concerned with quarterly profits and volumes to drive shareholder growth. This is the hidden issue with HFT, the stock exchanges need the volumes that HFT bring in order to drive volumes and profits. All Brad Katsuyama is doing at IEX, is bringing back the “honesty” function that stock exchanges use to provide in share transactions. If IEX becomes successful then look for the stock exchanges to change their business models to ensure they don’t lose order flow to IEX. Then want happens to IEX?

      This issue is far from over and it will be interesting to see the twists and curves this story takes over the coming year.

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