I moved house last
week and have suffered periods without power and, to date, no Internet, therefore
I may be feeling a little indisposed to technology at the moment.
That said, I feel I
have to highlight what seems to be a rather grand case of throwing someone
under the bus while taking a step back from the kerb yourself.
The Modern Markets
Initiative is a voice of the high frequency, non-bank market making community,
and indeed is a group with whom I often find myself in agreement when reading
their regular statements on market structure.
Last week, however,
the MMI seemed to lose a little perspective, or more pertinently failed to
include its members in the analysis, when it noted the finding at a recent
Federal Reserve Bank conference that when markets got busy (in US Treasuries)
“dealers refused to answer their phones”.
presenting recent analytical findings since the release of the joint staff
report on the October 15 “flash rally” in treasuries, showed a slide of
dealer-to-customer (D2C) request-for-quote (RFQ) activity before and during the
event,” MMI says in its statement, adding what appears to be its own analysis
that, “The data indicates that, despite incoming requests for quotes, dealers
essentially ignored many customer requests.”
The statement further
notes that, “Because banks have no obligations to provide quotes or tradable
prices, and only provide them after being asked, if they do not want to trade
they just ignore the inquiry.”
Just to be clear, there
is nothing in those statements that lacks factual accuracy, but I find them
one-eyed – even for a lobby group.
The MMI statement adds
later, “Contrast that with the findings of the joint government staff report on
the “flash rally” which found high frequency traders “as a group continued to
provide the majority of order book depth and a tight spread between bid and ask
prices throughout the day, even during the event window.” In short, HFT
answered the call.”
Well I know I am
feeling less than well disposed to anyone who understands technology better
than me (most people) but it strikes me that if “HFT answered the call” then we
wouldn’t have had a Flash Crash, or a collapse in EURCHF on January 15, or the
spike in US Treasuries last October.
A feature of the
market dislocation we have seen in recent years has been the withdrawal of all market makers from public venues –
hence the price gaps – and not just the major dealers. Non-bank firms have
admitted publicly that they “temporarily” pulled back from making prices on
certain days – and why shouldn’t they? They’re not charities.
I have some sympathy
with the view held by some non-bank firms that the bank’s “holier than thou”
attitude is a little grating when it comes to making markets, but to suggest
that it is only dealers than withdraw from markets is plain wrong.
Colin_lambert@profit-loss.com Twitter @lamboPnL