Washington, DC -- (ReleaseWire) -- 05/21/2014 -- Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on May 11, 2014, interviewed Thomas Peterffy, the founder and head of Interactive Brokers, an online discount brokerage firm with offices all over the world.
The show airs live on http://www.WMAL.com each Sunday at 11 am EDT. It now has over a year’s worth of achieved interviews for listeners free on-demand at http://www.financialmythbusting.com.
Dawn discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN as well as take podcasts on the road and forums for interaction. The show is a great complement to Dawn’s monthly investing seminars that take plac e at Tysons Corner in McLean, VA, where she discusses investing.
Thomas Peterffy is the founder and head of Interactive Brokers, an online discount brokerage firm with offices all over the world. With a net worth of $6.4 billion, Thomas is the 248th wealthiest billionaire in the world, and the 65th on the Forbes 400. His personal story to this point in life is all about the true American Dream. Peterffy emigrated to the United States from Hungary as a refugee in 1965 to escape communism. When he first arrived in New York City, he did not speak English. With hard work and dedication, he started Interactive Brokers, a business that employs thousands of people worldwide. Peterffy is also the man who built what could be called the first electronic trading computer that inputted rapid-fire orders on the NASDAQ elect ronic stock exchange in 1987. Now, however, he worries that they have too much advantage and influence over the financial market.
Q: So, there's a debate out there about liquidity versus illiquidity when we talk about high-frequency trading, and Morgan Stanley recently estimated that 84 percent of all stock trading is done using high-speed trading programs. Proponents of HFT say that it actually makes markets more liquid and increases depth, but now I understand that high-frequency traders are actually moving to the currency markets because stock volume has shrunk too much, and the FX has ongoing liquidity which allows for algorithmic trading to flourish. Is this the truth? Does it make our markets more liquid, or does it make them more illiquid?
A: There is a lot to say for both sides, but let me first make it very clear that in my view, the electronifications of the market has been extremely beneficial for individual investors, because, due to automation, brokers have become a great deal more efficient, and errors have been largely eliminated, and the cost of servicing customers has dras tically diminished. As an example, 15 years ago, if you wanted to do a trade, you would have to call your broker, give him your order, half an hour later he would call you back and tell you if he executed your order and at what price, and at the end you would end up with a commission bill of $50 or $100. So, you can compare that to today, when someone enters your order on your trading screen and get a confirmation within the same second. In the first quarter, for example, Interactive Brokers executed 582,000 customer trades on the average day, and all this automation saved us so much money that we were able to do this at the commission rate of $2.36 per trade.
Now, that is not to say that there are no problems with the markets. There are, and they should be fixed. I think that when brokers trade, again, their customers' orders or sell their customers' orders to other people who trading as them have a conflict of interest, and that is very difficult to overcome, and the investors would be well-advised not to use brokers who do that. Now, there is also the issue of high-frequency trading. It is somewhat unclear what high-frequency trading is. It‘s probably a combination of very fast and frequent trading that is not necessarily supportive or stable in liquid markets. Some high-frequency traders claim that they provide liquidity, on the other hand, we do have evidence that some of them take liquidity.
Q: So, where are they in the balance? I look at high-frequency traders as parasites who exact a toll from investors. I think they harm investors in two ways. One is by front running investors orders. That means that they, by whatever means, detect that the buyer is coming, slowly creeping down the wire, to take a prevailing offer. They send in a buyer there that is much faster and gets the offer before the original buyer there would get that, and will trade with that buyer there, the original buyer there, at the higher price and pocket the difference.
That is clearly harmful to investors. The other harm they cause is more indirect. They compete with market makers who are continuously providing liquidity bids below and offers above the market. They compete with them while the markets are stable, and they provide and trade against them when the markets move. This prompts market makers to decrease the liquidity they provide in moving markets and ultimately makes trading more expensive. This is the explanation for periodic sudden violent price runs in the markets like flash crashes and those fat-finger trading days.
A: That's correct.
Q: And Knight Capital, that type of situation?
A: That would have been hard to stop because that was a huge avalanche of orders, but many crashes and many runups happen. Big price spikes happen all the time and almost every day, and that's because the conventional market maker, who used to spend there and make continuous bids and offers is no longer there, at least not to the extent that it used to be.
Q: So does high-frequency trading actually erase competition and make this a zero-sum game for just the typical retail investor?
A: High-frequency traders compete with market makers, and that means in stable markets, they crowd them out to the extent that they provide a narrower market, and that is good for investors. But at the moment that the market starts moving, they immediately unload the position that they got into, and that moves the markets ahead of the investors, and so th e investors have to effectively act on a much wider market than they normally would, so unbalanced high-frequency traders appear to be harmful to investors.
Q: What about regulators who just can't seem to keep up with high-frequency trading? Has technology and market structure evolved so quickly that their capacity to understand or control it is just not there?
A: That’s absolutely correct. It's individual ingenuity on the part of some computer programmers that makes it hard to deal with, so we need certain regulations to deal with the minutiae of these issues. I would like to see the SEC mandate trading venues and exchanges to hold every order that would be removing liquidity, to hold it for up to 200 milliseconds, in a random time period. That would make it unpredictable for high-frequency traders as to what will happen to their orders, and they would desist from removing liquidity. To the extent that they add liquidity, it would not interfere with their activities, so markets would become more stable. This would be a very simple rule to implement, and I do not understand why they won't do it.
Q: Have they ever approached you to get your ideas about what they could do?
A: Under the old administration, they d id, under Mary Schapiro. The new Chairman and I have not had the opportunity to speak yet.
Q: Now that high-frequency trading is actually in the open, what about dark pool trading danger? The darkest side of the stock market is dark pools of liquidity which allow financiers to trade high volumes of liquidity without the public knowing. Is HFT only the tip of the iceberg as growing volumes of shares are actually traded in dark pools now?
A: There's a good side and a bad side to dark pools. Dark pools were originally conceived for large traders who would have very large positions to move and they didn't want to show their hand. So, they made a bid or an offer into a dark pool which would not be shown, and therefore people would not be frightened away from their size, and then brokers would go and broker the dark pools, looking if there was a bid or an offer there. If there was, they would just trade with that bid and offer, and often that bid and offer was better than the one that was shown in the marketplace. That is a valid use for dark pools. Unfortunately, there are also traders w ho then use dark pools to internalize individual customer orders or smaller orders, and that is not a good thing.
Q: So high frequency trading and dark pools are a higher form of capitalism, or is it just cheating?
A: It's both. Unfortunately with all these things people have to be good and responsible. Freedom allows you to do bad things and allows you to do good things, and then we clamp down on them, unfortunately, we clamp down on both. So, let's hope that it's on balance, a good thing.
Q: Thomas, you got your start on Wall Street after buying your seat on the American Stock Exchange in the 1970s, an exchange that was swallowed up by the New York Stock Exchange. We're seeing capital markets consolidating all over the world. Is this trend positive?
A: It is positive because when all the liquidity comes together, there is more grease to make sure the transactions happen in a smooth and liquid market. On balance that definitely is a good thing, and as a global marketplace we live on, that's good for people around the globe.
Q: You became well known following your epic ad in the 2012 campaign, which is on YouTube. It described you growing up in communist Hungary, talking about how you felt America was actually going in the wrong direction, a direction of socialism and communism. What are your thoughts two years later, and are you in even greater despair about the way that the United States is going?
A: I certainly am, although I'm hopeful that maybe in the midterm elections we can turn the direction in which we're going, at least to some extent. I'm extremely worried about socialism coming to the so-called developed world, in Europe and the United States. I think people are just blindfolded and they don't look back and they don't look at what happens after all these big turns. After the French Revolution or the revolutions running through Europe in the mid 1800s, and then what happened in Russia after the first World War, and then what happened in eastern Europe after the second World War. It's always the same story. People are unwilling to learn from it because they have this crazy idea of social justice, which is beautiful, but then eventually you have use things to enforce it.
About Bennett Group Financial Services LLC
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill. For more information, call 866-286-2268 or visit http://www.bennettgroupfinancial.com.
Securities offered through Western International Securities Inc. (WIS), member FINRA/SIPC. BGFS and WIS are separate and unaffiliated entities.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program on http://www.WMAL.com called Financial Myth Busting http://www.financialmythbusting.com. She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org