Episode Transcript
[00:00:14] Speaker A: You're listening to a John Lothian news podcast. In this episode, I sit down with Joe Saluzer, co founder and partner, Themis Trading and one of the most persistent critics of modern US equity market structure.
Joe tells me why more than a decade after his rigged market warning on national television, he still believes high frequency trading, maker taker rebates and complex order types stack the deck against long term investors.
He walks me through how regulation NMS reshaped equities into a fragmented maze of dark pools and speed games, why proposed changes to Rule 611 could backfire on retail traders, and how the SEC's push towards tokenization risks ignoring deeper structural flaws. If you want a blunt insider view of how the market really works and who it works for, stay tuned.
Can you discuss the origins of your firm Themis Trading, which you co founded in 2002, and how its mission has evolved over the last two decades?
[00:01:34] Speaker B: Sure.
We started out, we actually worked at instinet in the 90s. So we were electronic trading veterans if you want to call it. But Instinet was actually a pioneer in the field at the point in 2002 we thought, my partner and I at the time thought we could do this on our own and branch out and kind of have an independent firm, which is exactly what we did. It started out pretty much exactly where we left off at Instinet and, and then things started changing as we'll get into later, you know, with the rules and regulations of the market and you know, we saw a lot of stuff change which really created a backbone of our firm when it comes to market structure.
[00:02:09] Speaker A: Your appearance on 60 Minutes in October of 2010 brought high frequency trading to the national stage. How did that interview impact your career and the public's understanding of market structure?
[00:02:25] Speaker B: Yeah, it's such a tough topic, right. And even today when you talk to people about market structure, if they're not in the business, they'll just glaze over and have no idea what you're talking about. And it is so important. I mean it is the plumbing behind everything.
It is the engine that drives the car. But back then, Steve Croft and 60 Minutes came in and they were very interested in the topic of high frequency trading and they wanted to know how it would affect the average investor. And this was a little bit right after the flash crash of 2010. So they showed up here and, and wanted to know what we knew. And we, you know, we weren't whistleblowers or anything like that because obviously I'm not in the high Frequency trading world. But we're observers. We're market structure observers. So we explained how it works. We explained how, you know, the speed of the markets have changed everything and how what you think you're seeing and what HFTs will see are two different things. After the interview, we certainly got a lot of attention, good and bad.
You know, the industry.
The industry didn't like us. They don't want people airing their dirty laundry in public. And I was told that straight up. Somebody told me, we don't want our dirty laundry. And I said to them, you know what? That's your dirty laundry. It's not mine. And we're going to call it as we see it. And my job, and my only job is to protect my clients and to do the best possible job I can, executing their orders. So, you know, for us, market structure is a hobby. That's what I study. That's what I like. But we make our money. We earn our commissions through trading for our clients. So I need to protect them. So at all, you know, we thought it was the right thing to do, and I would do it again today if they called.
[00:03:55] Speaker A: What was Croft's reaction when he walked into your firm?
[00:04:00] Speaker B: It was funny because he thought his producer, before he came in here, his producer had pretty much told him that or explained that we were like a mom and pop shop. So he thought it was just kind of a couple of, you know, brokers. And he showed up, and we've got our Bloomberg terminals and our desk looks like every other desk on Wall Street. And there was eight or 10 of us sitting in the room at that time. And he looks, he goes, hey. He looks at his producer. He goes, you told me these guys were mom and pops. He's a bunch of pros. So, like, hold on this, Steve.
There's a difference in quality. We're certainly professionals, but we're not anywhere near what we're going to be talking about, HFTs and speed and everything else.
[00:04:33] Speaker A: What motivated you to co author. Co author the book broken markets in 2012? And do you feel the core warnings in that book have been heeded by regulators?
[00:04:45] Speaker B: We were writing a lot at the time, and we still write a lot of blog posts, letters, white papers, SEC comment letters. And actually, a couple of publishers came to us and said, hey, we've seen your writings. Would you be interested in putting it into a book? And never really had a thought about writing a book, that's for sure. But we're like, okay, fine. And my partner at the time, Sal Arnick, And I said, okay, we'll put these together. And kind of. We thought it would be easy, but it wasn't easy. It took forever. It was a really. Writing a book is difficult, but the main motive was to put our theory and what we found into paper and put it almost like, here's our Bible. And I still walk into clients sometimes and I'll bring a book, the book is over 13 years old now, and I'll drop it on the desk and I'll say, this still exists. What we wrote here still goes on.
The way markets work, way order routing works, the way rebates work, the way the colocation and speed and everything. It's all there still. So were some of the warnings heeded?
You know, we exposed and we talked. You know, I don't say exposed, but we talked about things that most people didn't know about. So now they knew about it. So there was information that was out there.
I still get a lot of, you know, I'll get professors coming to us now saying, hey, I have my class reading that book. Like, oh, really? That's fantastic. You know, but, you know, the whole point was just to, you know, shed a light on what was really going on in that engine of the stock market that most people really didn't know.
[00:06:08] Speaker A: Yeah. Okay.
You've served as a member of the CFTC Technology Advisory Committee a couple of times, starting both in 2012 and 2023. How does your work there differ from your advocacy with the sec?
[00:06:26] Speaker B: Yeah, you know, they're different organizations for sure. I mean, the CFTC is obviously much more focused on futures and commodities, which is obviously their name. They're a smaller organization.
I think on the first committee that I was on, that's when the high frequency trading tech term was very hot. People were talking about it. Nobody understood it and nobody knew how to define it. So the task that I was put on, the committee I was on was defining hft, you know, what is it? So I was on there with a whole bunch of industry guys and, you know, people who were the opposite side of what I was talking about. And it was a difficult committee to be on, let's just say trying to explain my point of view versus what they wanted to put into the definition.
In the end, the definition was written. I didn't like it. I dissented publicly, wrote a comment letter saying why we dissented to it. It didn't include everything that we wanted in there, but, you know, it was at least it was good in the sense that, again, people were talking about it, people Were saying, okay, this is what's going on within the markets. The SEC is obviously a lot different. The SEC is a much bigger organization, and they're the rule writers for our industry, right? For our business.
Those are the guys who really matter. Those are the guys who, you know, like, right now there's something going on. We'll probably talk about it later with Rule 611.
Those are the people that you really need to be in front of if you want to create change, or at least when change is going on. Have your name, have your what, your what you're thinking out there, you know, be known. And a lot of this stuff, by the way, everything that we talk about or everything I write about is usually a reflection of what my clients are thinking. And our clients are all institutional traders, hench funds, hedge funds, pension funds, mutual funds, and all, you know, traditional players. And a lot of times they won't talk in public or they'll have conflicts at their own place, so they can't write a letter, whatever it might be. But we talk to them and we get their opinions. And I try to aggregate a lot of that into our own thoughts. For instance, we just wrote a piece on prediction markets we can get into later. And a lot of them were like, holy crap. I didn't believe this was actually going on. And I'm like, yeah, don't worry. I got this. I'll write it. I'll take care of it.
[00:08:28] Speaker A: In June 2017, you testified before the House Financial Services Committee regarding the Main Street Growth Act. What was the primary message you hope to convey to Congress during that testimony?
[00:08:41] Speaker B: You know that one. You know, it was interesting. I was on again with a whole bunch of industry folks who were. You know, there were stock exchanges on my panel. There were an HFT sitting right next to me. There was a retail broker. All players who have a vested interest in the markets. And that's fine. Everybody's. Everyone's got their angle right. Everyone's got their line in the sand that they're going to fight for.
We were an outsider. My opinion, I was out there not selling anything, not saying, hey, exchanges are great. I'm an independent agency broker. Just telling you like it is. This is what we see. Here are the conflicts order routing conflicts, rebates. This is a problem. Selling of proprietary market data. This is a problem. This is leaking information. I was begging, basically telling Congress, you need to take a look at this. This is not exact. You need to understand how the engine works. And if you're just bypassing it, saying everything's great. And we have the deepest, most liquid water stock market in the world. No, that, that you can't just say that without understanding what's in the core of the stock market. So, you know, I got some good questions. It was a, it was an interesting experience for sure. But in the end, I don't think anything really changed or mattered.
[00:09:49] Speaker A: Yeah.
Recently, in 23rd, 2023, you joined the Board of Better Markets. How does this role align with your history of advocating for investor protection?
[00:10:02] Speaker B: Yeah, it's a perfect lineup. I mean, I'm so aligned with the Better Markets folks. Everything that they do, I mean, their advocates for the public, basically, and they go across, not only the stock market, they'll talk about a lot of the banking issues, which are really important out there. They're very involved with what's going on at the Fed, what's going on at the cftc, they're involved in. But when it comes to the SEC and the equity markets, we're very in touch. The consolidated audit trail is a typical thing that they've been looking at that we've advocated for, which we think is a great thing that now people are trying to strip and get rid of. It's the eyes for the regulators. It's a good way of policing the markets across different markets like the options market and the stock market. So better markets will write lots of comment letters, will be in front of Congress folks all the time. They're on the Hill. They really know the ins and outs of D.C. so, you know, when it comes to. If you need somebody to advocate for you, those are the guys, you know, I really, really believe in them. Dennis Keller, who runs it, is a fantastic guy who really has the DC insider experience. But, you know, they say they speak financial Latin, which is kind of a great term, but they're on the other side of most of these lobbying issues. So they're very similar to us. They, they're on the other side and they're fighting the system in the sense of at least making, not say fighting the system, but making aware. Making the public aware of what's going on, which is really the most important part.
[00:11:21] Speaker A: Throughout your career, you filed numerous comment letters with the SEC regarding exchange order types and market structure proposals. Which of these letters do you believe was the most critical in shifting regulatory perspective?
[00:11:35] Speaker B: Unfortunately, none of them.
You know, I write them because it's important.
It is so important to get it on file so that the SEC knows there's another voice as opposed to. Because if you read most of the letters, they're all very much aligned the industry, you know, they have their little bit differences. Maybe the exchanges will tweak a little bit here and there, but they're all on the same page. So a lot of times my letters are just the opposite. And I want to make sure the commission understands that there's an institutional investment community out there. There's a bunch of public corporations who never write letters. And they need to be aware of the other constituents, not just the insiders, the industry folks who are pitching their own book. Right. So my letters are often in that direction.
I've heard from folks at the SEC that they've actually enjoyed my letters and they're like, oh, we always like when you're. Because it's going to be different. And you know, I don't pull any punches. But that's the whole point. Just get it on the record. And I urge everybody to do that. If there's a proposal out there that you don't like, make sure the SEC knows about it. Even if you write just two paragraphs, whatever it is, they read these things and then they actually will cite them in the final rule. And a lot of times I'll be cited as a footnote of somebody who is dissenting from the regular opinion. And I laugh. I'm like, oh, at least we made it into the final rule here. But it's super important that people do this.
[00:12:54] Speaker A: All right? Prior to Regulation NMS, 80% of the shares were traded at the New York Stock Exchange, but that number has dropped significantly. How did witnessing this fragmentation firsthand influence your views of market complexity?
[00:13:15] Speaker B: Yeah, I mean, it's certainly, you know, Reg NMS, which was 2007 when it got, you know, when it got implemented, it changed everything. Like you said, the over the New York Stock Exchange overnight went to 25% and now they're actually in single digits. So it is a. It's unbelievable what happened to liquidity. And it fragmented the liquidity as much as there were problems prior to reg nms. And I was a critic of some things back then as well. At least you knew there was liquidity, at least on the New York Stock Exchange. And it was, you know, there was a different game and you had problems and you would call about, you know, people would complain about the specials and whatever it be. But now the problem that we have and we've had since Reg NMS is that liquidity is fragmented and it's dispersed among all of these different venues, whether they're lit venues like the exchanges or, or dark venues like ATS's. Or hidden volume on the exchanges. And the whole game is trying to put the pieces back together and without getting spotted. Right. And that's the whole biggest problem with this stock market is that routers and algorithms and they think they're smart and they think they can figure out the way to put things back together. But you're not that smart. You're leaving trails, you're leaving cookie crumbs and you're being spotted by guys who are more sophisticated than you and you're taking advantage of you and they're scalping you for a couple of pennies here and there's. And at the end of the day, maybe that algo got V WAP at the end of first trade. But did you really do a good job? Should you have done better than that if you weren't spotted? So, you know, it changed a lot. Reagan Ms. Dispersed the liquidity and we still haven't figured it out and we're actually making it worse. It continues to get worse, not better.
[00:14:47] Speaker A: In your 60 Minutes interview, you stated that the market is a rigged game where those with the fastest computers have an unfair advantage.
Do you still stand by that characterization today and what was the reaction you got from that comment?
[00:15:05] Speaker B: Yeah, they didn't like the word rigged, that's for sure. I think Michael Lewis used in his book too. Anytime you say the word rig, the industry they will, they will come at you. But you know what, listen, if you're in this game and you're not, you know, you got to be involved and you can't be afraid to say something. And if I see it as rigged, that's the word that I'm using, it rigged a sense of that you're not going to compete with an hft, so just get that out of your mind. They're always going to beat you on speed. HFTs fight against themselves. They compete against each other to win the trade. So you don't play that game. So I play a different game. I play the longer game without, without trades. You know, I'm usually whatever. I won't get into all the strategies that we use, but we try not to feed into the HFT monster. But rigged also means not from the sense of what the HFTs will do, what they do. Prop traders will do what they do because that's who they are. A lion will go out to the jungle and kill it. That's what they do. I have no, I understand it, but I don't need to feed them extra tools like the stock exchanges do. The stock Exchanges will bend over backwards, give them special order types, will give them more data in their proprietary data fees, we'll give them better rebates, all these things to win that market share for themselves. And because they're obviously public companies themselves and they have to increase their bottom line. So when I say rigged, I mean it's that they're getting these tools to take advantage of regular investors. And there's really regular investors can't do anything about it.
[00:16:30] Speaker A: Okay, you've described high frequency traders as parasites who suck money out of the market without raising capital for companies.
How did the industry respond to that strong critique?
[00:16:45] Speaker B: Oh, they love it. They, they, they just love it. Listen, they, they, they look at us, John, as, as we're gadflies. We're annoying. Where you're like, go away, stop complaining. What are you complaining about? And I turned around, I said, you know what?
23, 24 years later, I'm still here. I'm still here critiquing. And I'm still going to be doing it as long as I can, because that's how important I think this is. And if, you know, they're parasitic in the sense that they will move from, from whatever it may be to make money. And again, like I said, they're going to do what they do because that's who they are. Whether it's in stocks or options or crypto or prediction markets, they're going to continue to move on. While those fertile fields, I also call them locusts by the way, not just parasites because they move and they just strip as much as they can and they'll just destroy everything and take everything they can and then move on again. It is what it is.
It is a type of participant in this market. There are long term traders, there is retail traders, there's HFTs. They are who they are. So if I label them that way, so be it.
[00:17:49] Speaker A: You have argued that colocation allows HFT firms to see order flow milliseconds before regular investors. Do you believe this is still the case? And why do you believe this speed advantage translates into billions of dollars in unfair profits?
[00:18:05] Speaker B: Sure. I mean, it's nanoseconds now. It's ridiculous. The speed differential. As long as there's a differential, that's all that matters. And they do. Sam, listen. They built systems. They wouldn't spend as much money as they do building these systems. And stock exchanges wouldn't be building data centers and colocation centers if they weren't making money and if there wasn't an advantage. So there's Certainly there's always going to be a speed advantage. And people may say, and you traded in the pits and you know how it was back then. And they may say, well, the guys in the pit had an advantage. And you can make that argument. You could say that it's now electronic, you know, basically just an electronic thing. But it is. So there is an advantage. And it, but now I would argue, okay, if you have this advantage, you know, sometimes if you have a benefit, what are you returning like a specialist? Back then they had the advantage of being on, you know, on the floor, but their job was to also have liquidity, right? They, they did have affirmative obligations there. So for an hft, it's just the opposite. Their job is to make money for their own firm. They're not obligated to supply anything to the market, but yet they enjoy all these benefits like colo and buying prop data feeds. And again, this is available to anybody. You and I can also do this if we wanted to set up. I can go into the ask, go to the New York Stock Exchange today and say, hey, I want to rent space at Malwa. Can you get a rack for me? But it doesn't fit my business model, so why would I do that? But it is an advantage, plain and simple, and it'll always be an advantage for them.
[00:19:30] Speaker A: You've strongly criticized the maker taker rebate system, arguing that it creates conflicts of interest where brokers route orders to venues that pay them the highest rebates, rather than where the clients get the best execution.
What do you think today?
[00:19:48] Speaker B: Yeah, it's still the same. I mean, maker taker, it's interesting originally, almost. I believe it started with the firm island back in the late 90s when they were. Island was a really interesting ECN and there's some smart folks over there and they figured out, hey, how can we drag some liquidity away from some of the other ECNs? We can pay for order flow, basically, which is what it is. We can add rebates. They started it and before you know it, stock exchanges copied it and it became the, you know, model, the essential model of everybody where you pay for it to add liquidity. You, you know, you, you get paid to add liquidity, you pay to take it. We say it distorts flow because, you know, it's basically incenting routers to go to certain spots. So if you're routing, you'll try to minimize your fee. An order smart order router at a brokerage firm, if they're going to charge an Institutional client, I don't know, say a half a penny. Well, they can't be paying 30 mils or almost a third of a penny in access fees or the profit margins are gone. So they'll go out there, maybe they'll post a bid rather than taking the offer right away, but maybe that's not the right for that trade. You shouldn't be doing that. But they're going to do it anyway. And once they post the bid, they're going to be spotted by anybody who reads a data feed. And now all of a sudden, the stock is up two pennies and they're getting hit. Okay, they're collecting a rebate for themselves, but they just cost the client 2 cents. That doesn't make any sense to me. So you should have no conflict of interest. In other words, my opinion would be stock exchanges, everybody should have a flat take, take fee. And I would recommend a tenth of a penny to take, a tenth of a penny to make. I pay it either way as a broker. That's what I think. And that way the stock exchanges still get paid. And actually they'd get paid a lot more than they're getting paid right now because on average, they're only making 2 or 3 mils a share. I would suggest you can make 20 mils a share if you get 10 on both sides and it takes the order routing conflict out. But of course, the exchanges would say, oh, you're going to kill liquidity. You're going to kill. No, I'm going to kill some volume. I'm going to kill noisy volume. That shouldn't exist anyway.
Spreads are going to widen. They're going to say, I'm like, spreads will revert to the natural spike where they should be, maybe they shouldn't be a penny for 100 shares. Maybe it should be two cents for a thousand shares.
But I think by getting rid of some of the order routing conflicts, you would make a better, more depth, better liquid market.
[00:22:01] Speaker A: Okay, can you explain your battle against the complexity of the US Stock market, which you famously compared to a Rube Goldberg machine that requires too much intermediation to match buyers and sellers?
Sure.
[00:22:19] Speaker B: I mean the Rube Goldberg, which I love that example because the cartoon is great. If younger folks, if you don't know what it is, Google it. But it is basically a very simple process. What we do. We're not a rocket scientist over here, right? We're not the smartest folks in the room. Somebody, there's a buyer, there's a seller. Let's just put the Two together and match them up. Right? But what we have to do is go through this maze in order to get from that buy to the sell. And the maze is all of these dark pools, all of these segmented pools of liquidity that exist, hidden order for special order types, guys who are posting post only orders to try to sniff out another guy. I mean, it is a ridiculous process and an unnecessary process. You should simplify it. And this has been true. We've tried this for years to simplify this thing. But because it's so many embedded conflicts of interest by so many players, like exchanges like dark pools, like HFTs, like brokers, you will not change this. It's just impossible to change it. I agree. People have said this to me before, you can't put the toothpaste back in the tube. And you know what? You're right. I give up. I give up. All right. You can't do it. You've screwed this thing up so bad. It's such a mess. This is it. But now you have to navigate around it to the best way you can.
[00:23:32] Speaker A: Aren't there some exchanges that are trying to simplify it though? The iexs or the memexs or whatever?
[00:23:41] Speaker B: Yes, but the problem is they're caught in the ecosystem of everybody else. If all IEX is still by far my favorite exchange, we've been with them since day one. Some people say, do you work there? I say, no, I'm an advocate. I believe what they do is the right way of doing business. Tenth, if you want to trade on the non lit order book, it's a tenth of a penny to make, tenth of a penny to take.
They don't have a data feed selling out the hidden flow. They do have regular data feeds, but it's cleaner and it's midpoint fills and you can get a lot of executions there without the noise that you do in the regular market. But they're also part of the bigger system. They have to be involved with the 17 stock exchanges and all the other pools. So it's really hard to separate one.
There are some dark pools which are better things like BIDS and Liquid Net, which are block trading systems which we find liquidity and bids a lot. It's a lot more ships passing in the night. It's a little bit more difficult. But yeah, my job is to find liquidity. You know, I'm not trading. We're usually trading 50, 100,000, 200,000 shares for a client per day. You're looking for chunks and most of those clients would if they could type of deal. I'm trying to find liquidity. I don't want to spray it all over the place. But you still have to operate within that ecosystem.
[00:24:53] Speaker A: You highlighted a case where Citadel was fined $22 million for misleading brokers about pricing in dark pools.
Does this validate your long standing concerns about the lack of transparency in off exchange trading?
[00:25:07] Speaker B: Yes, actually it's a little bit better now. There is something called a form ATS which has now been created since that case was done. Where, excuse me, some of the dark pools will have to put more detail about what's going on there. Pool not quite as much as an exchange, but there's stuff that we can find now I can look in there, see how they're segmenting their pools, you know what kind of cheering they're doing. So I can find out more information than I could back then. But you know, dark pools, they give. By the way, the industry gave a real bad name when they called them dark pools. Whatever genius.
What that can came up with. That was a big mistake. They're all, listen, they're, they're alternative trading systems. There are hidden pools of liquidity which do not operate on exchanges. I don't have a problem with that. I understand the way the market works, I understand the ecosystem. But when you have folks who are, you know, it's a lot less transparency if you didn't know what was going on. But we do know more now. So you just, it's by everywhere. But you have to be careful when you're operating in these pools, we're always using minimum fill quantities. Most of the time you got to be careful you're not getting sniffed because once they sniff you or they ping you, you know, things get a little ugly. So it is an issue still. But it has gotten better since then.
[00:26:16] Speaker A: Okay, why do you oppose the behavior of exchanges regarding post only orders, specifically citing an instance where an Exchange was fined 14 million for order type behaviors that allowed information leakage?
[00:26:32] Speaker B: Yeah, these are like those, they originally called them hide not slide type of orders where it's basically giving a free pass to somebody, somebody can enter an order and if they don't get, if it automatically back then it was, they would get a cancellation and it was basically telling them that there was a hidden order on the book of that exchange. So they, they didn't want to trade with it. Basically they're just trying to sniff out to see if there's any liquidity and that's how they're building their model. And you know how do HFTs make money? They have built a better model. Right. They try to figure out where the liquidity is, when it's going to shift, how the book is going to move. So to us, post only orders don't make any sense. If I want to trade, I should interact with that book. If I post a bid for 5 cents and it happens to be an offer at 5 cents hidden on that book, I should trade. You shouldn't slide down. And just the opposite, I shouldn't. The guy who's doing that is gaining information on my order flow. It should not be that way. Why should you gain information? And you didn't cost you anything. If you trade 100 shares and then you cancel, at least it costs you 100 shares. So post only orders, in my opinion, in that sense add no value.
It's good for the trader who's doing it, who's gaining it. And also another reason why they don't want to do it is they don't want to pay an access fee. So going back to that make or take a model, access fees distort a trade that should have happened. So if you take that away, maybe you'll actually gain more liquidity. Things will start to trade. But that's not what they want. The reason why they're doing that is they don't want to trade. They want to try to find out what's going on.
[00:27:56] Speaker A: Yeah, you referenced this earlier. What is the Future of Rule 611 and what impact might a change in it have on the future of tokenized equity trading?
[00:28:09] Speaker B: 611, you know that that comes out of Reg MS, which, you know, in our book we critiqued Reg NMS very harshly because it was responsible for fragmenting liquidity and creating what we have today. It did disperse that 80% of New York Stock Exchange volume into many, many different venues. But part of RUAG NMS was Rule 611, which is known as the order protection rule, which says that if you're the best bid or you're the best offer, you need to be traded on the top of the book. You need to be traded with before that somebody else can go to the next level. It gives that, you know, that MBBO some substance, some, some credibility.
And I don't. We think that's actually a good thing. Okay. It actually it's. It's a. It's protecting retail investors who want to tighten up a spread. Maybe say a spread is 5 cents, 10 cents and a retail guy comes in at 8 cents and says, I'd pay 8 cents. Well, then you should get to trade at 8 cents. Somebody shouldn't be able to trade through you. So what's happening now? For many, many years, this has been talked about in the industry. You know, do we really need it? How does it interact with access fees? How does it interact with all these other things? But the SEC right now is on a mission, and this is the new SEC under Chairman Atkins, and they are on a mission to get rid of 611. You know, they want this thing, and this is my opinion, of course, but everything I can read into it is they want to get rid of it.
Their reason, actually, it's funny because Chairman Atkins has spoken many times on this, but one time he said, reg NMS is built on flawed foundations, has invited gamesmanship and contributed to the fragmentation of our markets, the dispersal of liquidity and diminished Transparency. I agree 100%. But by getting rid of 611, are you fixing any of those problems that Chairman Atkins is talking about? The SEC apparently thinks that it will fix a lot of these issues.
A lot of folks in the industry thinks it think they will fix a lot of issues, which I kind of find interesting. I don't think it helps. I think you're still going to have all the same problems that Chairman Atkins said there in that statement and 6 11. All you're going to do is be hurting retail investors who are trying to actually tighten up a spread. So it has not been proven to me that that is the reason for these, you know, for the problems in the market. However, to us, it appears that there's an alternative motive here. The SEC is very big on something called project crypto, and they're not shy about it. And it seems like every other week there's a speaker from the SEC talking about tokenization and what they wanted, how they're going to change the market. And maybe that's a good thing. Maybe tokenization is a good thing and we can squeeze out some, some cost and it'll be much more efficient and we'll get instantaneous clearing and all that. Possibly good, but there's something standing in its way, apparently, and it's rule 611 because where if you can't really trade, you can't trade on a tokenized market unless you're trading through the regular market first. So I think they want to get rid of it partially to, to basically help the tokenization efforts. Don't know. But again, it hasn't been proven to me why 611 is the problem. I would argue. And we wrote a Comment letter that in our comment letter there were many other things you can do to fix the market. One of them might be like we talked about before, getting rid of rebates. One of them might be stripping down some of these proprietary data fees which give out too much information. You know, you want to add confidence for investors. I don't think getting rid of a rule or which will hurt retail investors is a good idea.
[00:31:21] Speaker A: Regarding the tick size pilot, you argued that it was not a failure but a necessary step to help small cap companies that are currently ignored by liquidity providers because they aren't profitable to trade under current spreads.
What do you think?
[00:31:39] Speaker B: Yeah, I think one size doesn't fit all. All stocks trade differently small caps. And I trade a lot of small caps here for our clients. They trade very differently than a large cap. Or you know, let's just say instead of saying small caps, large cap, say penny spreads versus nickel spreads, 10 cent spread and we trade stocks that 30 cent spreads. People think that, oh my God, yeah, they're out there and 30 cents with 100 shares up, right? So there's really not much of a market there. So you have to be very, very careful in there. And the idea of the tick size pilot was maybe you can aggregate liquidity instead of having 100 shares. You can get more if you had a nickel spread or not spread increment. And that's the other.
A lot of people said right away you could widen spreads. In fact, you can tighten spreads if you increase the tick. If you say okay, instead of having a penny tick, you make a 2 cent tick or 5 cent tick, you could actually tighten up a spread that's now $0.30 and make it $0.20 and add liquidity. And they tried this in the tick size pilot and the industry hated the tick size pilot. Oh, disaster.
Everything you read on, oh, it was a disaster. Why'd they even do it? But if you look at it actually the small caps actually traded better and there was actually more bucketing of liquidity. So there was some merit to it. They didn't want it. For whatever reason, they got rid of it. So here we are trading small caps just like we trade large caps, fitting them in the same freaking model. And it just, you know, at least they could have tried something else, but they're not going to do it.
[00:33:05] Speaker A: One size fits all. I love that you have stated that the definition of a retail investor is often misunderstood as retail interests are actually behind the vast institutional pension and 401k funds that are negatively impacted by market conflicts.
Who Is a retail trader?
[00:33:28] Speaker B: Yeah, you know, that's a great question. Nowadays, you know, years ago that retail trader was somebody 100 shares every month or two trading in their personal account and that was it. Nowadays, you know, over 20, 25% of the volume is technically retail. But these traders are not trading 100 shares, they're active participants. You know, the post Covid mentality of some of these traders is they're very, very active. They're trading on systems like Robinhood where it's free or whatever retail broker it may be.
They're super active and they're, you know, they're involved in meme stocks, right, or whatever the hot trade of the day is and you know, listen, I wish them well and any participant is good. We think the best way to have a healthy market is to have all those participants interacting with each other. Do you really want to find price discovery without any noise in between like we have right now? Retail traders are great. I mean there's nothing wrong with them and they should be involved but they need, they should also understand how this thing works and they should also understand, make sure they know how the mechanics are working.
[00:34:28] Speaker A: All right, last question. You have advocated for a consolidated audit trail CAT to improve surveillance but argued it falls short because it does not include the futures market regulated by the cftc. Will we ever have an effective cat?
[00:34:44] Speaker B: No.
Short answer, no, actually we're going to have what we have now. They're trying to strip down, they're trying to make it worse.
It is by and I will admit the cost overruns are or shocking how much money this thing cost to build. Obviously whoever built it initially there was a firm called Thesis, they were out of control. FINRA took it over this thing, it needs to be paired back for cost wise there are cost savings that could be had easily, you know, whatever it is, cloud savings and so on. But what's so important for regulators, and I'll go back to the flash crash of 2010 is they need to identify when a problem occurs quickly and tell the public what happened. Okay. Six months after the flash crash they came out with a report which still wasn't a good reason as to what happened. Still to this day people debate exactly what happened during the flash crash. That is unacceptable. Unacceptable. So but what they have now, a consolidated audit trail from what I understand is a very powerful tool that can really put the pieces together much quicker. So maybe they can save some money, maybe they don't need a dynamic every minute of the day. They could put it on a delay, whatever it may be, but stop stripping. Some folks in the industry are trying to strip out certain information, kind of ridiculous stuff like options, quotes. They didn't want quotes in there. I'm like, what? You need this? You need to have the public.
The most important thing in a market is confidence, right? If the confidence of the market goes, you're gone, you're done. So public needs. The public needs to feel that the regulators are watching. They understand what's going on, and. And if there's some bad stuff going on, they'll fix it right away. The CAT does that, but the industry doesn't like it because maybe there's too many eyeballs on it, whatever it might be.
So rather than adding futures, which I'd like, I'd like them to see add, crypto, whatever asset is, put it all together, they're stripping stuff away. And actually, they're making it worse. Folks in Congress, there are certain Congress have no idea, by the way, how market structure works, and they're advocating to get rid of the cat. I mean, obviously we know what's going on there. We know how DC Money works and lobbying and so on. So it's unfortunate. I really thought the CAT was a great idea. It took forever to build, by the way, and cost too much, like we said. But I hope they don't destroy.
