High Frequency Trading and the Future of Finance

Ideas in Action with Jim Glassman is a new half-hour weekly series on ideas and their consequences.

When people think of the stock market, they think of Wall Street. But the world of finance is changing, and high-powered computers and high frequency trading methods are quickly taking on a larger role. Is this safe, and who wins and who loses?

Transcript

IDEAS IN ACTION with Jim Glassman
High Frequency Trading and the Future of Finance

JIM GLASSMAN:
Welcome to Idea in Action, a television series about ideas and their consequences. I'm Jim Glassman. This week, it's called "high frequency trading." And it is changing the way Wall Street works. Computers, using complicated algorithms, make trades in milliseconds, moving markets, and gaining and losing millions in the blink of an eye. This turbo-charged investing has caught the attention of financial regulators. But defenders say the real winner is the small investor, benefits from added liquidity, and reduced trading costs. Joining me to discuss the benefits and risks of high frequency trading are Ted Kaufman, professor of law at Duke Law School and former U.S. Senator from Delaware. Cameron Smith, president of Quantlab Financial, a high frequency trading firm. And Adam Sussman, director of research at the TABB Group, financial research company. Topic this week, high frequency trading on Wall Street. This is Ideas in Action.

ANNOUNCER:
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JIM GLASSMAN:
Welcome all. Yeah, Cam-- Cameron, before we get too deeply into high frequency trading, can you just explain how it works? I mean, I've heard that the-- the average amount of time that-- that a company like yours holds onto a stock is, like, you know, three tenths of a second or something.

CAMERON SMITH:
No, I don't-- I don't think it's quite that fast.

JIM GLASSMAN:
Well, just-- just tell us how it works.

CAMERON SMITH:
All right, well-- maybe in-- an example would be the best way to-- to talk about it. So take-- take a stock like-- United Airlines. What-- what we do is take in all the data regarding United Airlines. You look at the stock, you know, buys and sells, right? Then maybe also you would also look at-- related securities, so other airlines. And what you're trying to do is-- like, Benjamin Graham or Warren Buffet, they would look at the value of a stock, you know, in 10, 12 months or whatever, right? Based on book value, something like that.

What we're doing is we're trying to determine fair value also, but not fair value, you know, in 12 months, but fair value at 9:42 and 11 seconds, and then at 12 seconds. So-- 'cause this is a continuous market. You have to value the stock at every moment in the trading day.

So again, you would look-- so taking United Airlines. You'd look at related sec-- related securities, maybe you're looking at the price of oil, because oil impacts-- airline stocks, potentially. Maybe you're looking at affects. You're looking at whatever indicators are going to help you. And you-- and you don't-- these indicators are-- you're looking at the market itself. The market's telling you what it should be priced. And you're making-- you're making your bet as to what--

JIM GLASSMAN:
The way you say "you" you mean the computer?

(OVERTALK)

CAMERON SMITH:
The-- the-- well, the-- the algorithm. Yes, it's programmed by people, but--

JIM GLASSMAN:
That-- for example, if the oil price goes way-- you know, moves up, a minute ago, and you figure, "Well, that's-- that's going to be bad for an airline, but it's not really quite reflected in the price of the airline," your-- your computer is saying, "Sell"? Is that r-- is that--

(OVERTALK)

CAMERON SMITH:
It could-- it could be. It might not be as tangential, but-- but if you-- it might just be more buyers and sellers in-- in United or-- or-- or maybe other stocks. Southwest Airlines just moved and-- and we know that from past experiences those are correlated. So you might want to--

JIM GLASSMAN:
Okay, well, let's say you--

CAMERON SMITH:
--Buy or sell--

JIM GLASSMAN:
--Buy, but then something happens a second later or two seconds later, and then you sell. I mean, the-- high frequency trading is trading that is high frequency.

CAMERON SMITH:
No, I--

JIM GLASSMAN:
I mean, you sell pretty quickly after you buy, right?

CAMERON SMITH:
The holding periods can vary. I mean-- if you were able to buy and sell within microseconds or milliseconds, what-- which is what some people say, that's actually an arbitrage strategy. I can only speak for our firm. We buy with-- you know, we have to-- if you just bought-- on the offer, you got-- you got to wait till the market moves before you can make-- any-- any profit on that, right? So you need to wait-- you know, could be many seconds, could be minutes, it could even be hours, depending on how active the stock is.

JIM GLASSMAN:
The point about high frequency trading, though, is that it's very fast, as the name implies?

TED KAUFMAN:
Yeah.

JIM GLASSMAN:
And you're concerned about that?

TED KAUFMAN:
No, I'm not concerned that it's fast. I-- I'm concerned there's just been a great deal of change. Clearly, the-- the basic buying and sale of stocks has remained the same. Cameron's right about that. But we've gone to this thing now, where the vast majority of-- of what we're doing is controlled - over 60% is controlled by high frequency traders. And frankly, we really don't know what's happening with the high frequency traders.

We don't have the information like we used to have before. You had a ticker tape go on the old day. You had ticker tape. Everybody would see what the price was. You could find out who the dealers were. And so my concern is that when you don't have transparency. And I mean, transparency being the ability of-- of-- of an organization to find out what's going on in-- in-- in the markets.

Then you don't have transparency. Then it's awful hard-- to be sure that you have fairness. And so my approach is not that there's anything intrinsically wrong with high frequency trading. My point is that we've had a lot of change. There's a lot of money involved. We have-- don't have a lot of transparency, in terms of regulators being able to figure out what's going on. And therefore, in the past, when that's happened, we've had some very bad-- bad things happen.

We don't have all the information. What we need is what I've called for and a n-- bunch of people have called for and the Securities Exchange Commission's called for is a consolidated audit trail. Now basically you've got to have a situation where the regulators can see what's going on. They know what's going on. And they can regulate it.

JIM GLASSMAN:
And-- and h-- Adam, how important is that, to-- to-- for the regulators to find out what's going on? And maybe-- in kind of very much an ex post facto way.

ADAM SUSSMAN:
Right. I think that although the U.S. markets have probably more transparency than any other equity market structure around the globe that there is room for improvement. I mean, I think all three of us would agree that it's not a perfect market structure. Particularly as you look across different sized companies and how they trade. You know, in terms of the consodi-- consolidated audit trail, I think most people agree that-- you know, that some form of increased information in the hands of regulators is a good idea. What's being debated is more, you know, how much should it cost? And which is-- you know, depends on how frequently the information has to be reported.

JIM GLASSMAN:
But is-- is it even possible, except for a few months down the road, to find out what happened? In other words-- in other words-- has high frequency trading kind of prevented us from knowing today what this audit trail would look like?

ADAM SUSSMAN:
No, I don't think that there's anything inherently-- inherent about high frequency trading or even our market structure itself-- you know, that would prevent the regulators from being able to, you know, piece together a better understanding of-- of the markets. Everything's electronic. Electronic-- you know, electronic-- markets are inherently easier to piece together than markets where there would be no record-- you know, there'd be no file. We have an easier time going about this than most other markets.

JIM GLASSMAN:
So there's this-- this-- this mystery or lack of-- lack of transparency that you talk about, Ted. But what-- what are you worried about, exactly?

TED KAUFMAN:
Well, I'm worried about-- if you look back over our history and you find-- activities, financial activities that-- have a lot of money and a lot of change and no regulation, bad things happen. Look at derivatives. I mean, derivatives, basically, we had a lot of money in derivatives, a lot of change in derivatives. When from practically nothing to trillions of dollars. The Congress came in and-- and-- and passed with-- signed by the president, by Clinton, the-- the act to say that government cannot regulate derivatives.

And then you look at what happened. I mean, it was just an unmitigated disaster. Remember the junk bond thing? And Mike Milken, who was a big junk bond trader, he said, "Look, Ted, don't be worried about junk bonds, because-- no one's ever lost a dollar in junk bonds." Until everybody started losing millions of dollars.

It was the same thing with the savings and loan crisis. So I think as-- if you look at it from-- as a policymaker, you say, "Okay, wherever I've got a lot of change and a lot of money. I've got to be trans-- transparency. And I've got to regulate. Now we can argue about regulation in general. But in regulation specifically, in this case, I think there has to be some better idea of what's actually happening, because nobody knows. I mean-- Cameron says it. Adam says it. We don't really know what's happening. There's all kinds of allegations. But regardless of the allegations, what is-- we don't know what's actually happening.

JIM GLASSMAN:
Okay, so-- but what-- so, Adam, I mean, what-- what would your worries be about what's happening? Like, what-- I guess front running? I mean, someone who's trying to push up the price of a stock and then-- and then sell it? Is-- is that a problem?

ADAM SUSSMAN:
I think the problem is really in-- in small cap names, which is really, if you think about, you know, the economy and you think about jobs and you think about where-- you know, where growth is going to come from for the U.S., we need to do a better job of supporting our small cap names. And I think that's where today's market structure, where it really is geared towards electronic trading, and-- and kind of-- edged out-- the floor traders. I think that's-- we-- we need to, you know, create more opportunities for small cap stocks.

JIM GLASSMAN:
So what can happen to these small cap stocks? Are you saying that--

ADAM SUSSMAN:
Well, what happens is that--

JIM GLASSMAN:
--That the price can drop a lot or--

ADAM SUSSMAN:
Yeah, because there's not as much liquidity in those names. They tend-- you know, intraday volatility tends to be exacerbated in those names.

TED KAUFMAN:
There's another problem, yeah. There's another problem on small cap stocks. And that is there isn't much interest in them anymore. Essentially, most of this is about a hundred stocks, 95% of the stocks aren't being covered. So there's-- a wonderful article out by David Wilde, who used to be an executive with NASDAQ, when he talks about the pro-- this is a real problem for IPOs. That we're not having as many IPOs as we should. And we should be having IPOs, because everyone is moving their money and their interest towards the high frequency trading in the top 100 stocks.

But I think the real problem here is not-- you know, we can-- people can talk about front running and all these different things. And by the way, if you go overseas to England and to France and now Canada, they're doing in-depth studies on all these issues. But my concern is nobody knows. No one can tell-- unless someone comes forward from-- from a firm and says, "Yep, we do front running. Yep, we do this." But there's no way that anyone knows what-- what's happening there.

JIM GLASSMAN:
Whereas in the old traditional trading, you could see the paper trail, you could--

TED KAUFMAN:
Yeah, there were problems with specialists. I'm not-- I'm not saying there weren't problems with specialist. But I think--

JIM GLASSMAN:
Cameron thinks you couldn't before.

CAMERON SMITH:
Yeah, I-- I think, actually, it's-- it's exactly the opposite of-- of maybe the conventional wisdom in that because you had a floor-based environment, where people could look at each other. You'd know who was walking in with paper. "Oh, there's the Fidelity floor broker." Completely unregulable. Now we have a perfect audit trail. You-- you see everything.

And plus, unlike in the past, everyone sees everything at the same time. Just 'cause you-- you don't-- can't see the floor broker from Fidelity walking in the crowd anymore. There's no crowd. It's all automated. We're all on a level playing field with respect to information.

JIM GLASSMAN:
Adam, when Americans think of the stock market, they probably think of-- the New York Stock Exchange, traders on the floor, but only about 40% of the trading volume in America takes place on Wall Street. Where does the rest of the action take place?

ADAM SUSSMAN:
You know, over the last number of years, there's been-- financial regulations that have come in that have allowed competition-- among the exchanges. And part of that competition is off-exchange trading venues. Sometimes referred to as "alternative trading systems" or "dark pools." And that's really allowed-- you know, differentiated-- execution venues to come in and-- and offer a different type of service to-- to the trading markets. And that's-- that's kind of where that other-- that other-- volume is taking place.

JIM GLASSMAN:
So-- Cameron-- you know, almost 90 million Americans have money in the stock market. Should they be worried about all these-- these-- these other places, these dark pools, these strange places where trading is going on?

CAMERON SMITH:
Yeah, that's right. I think-- I think there is a real issue there that needs to be considered further. We've had a real dramatic change in the market structure over the last ten years. If you look back just into early 2000s-- for instance, the New York Stock Exchange had about 80% market share.

So we had very concentrating-- concentrated trading on-- on New York. And-- and to a lesser extent, but still similar, on NASDAQ. And the-- with the-- advent of reg-- regulation N.M.S. and-- and proliferation of dark pools and the like, actually no one venue has more than around 25% now. We've got about 10 or 11 exchanges, and honestly, I think you're going to have a lot more as time goes on. And in part, I think it's due to regulation. And I think there's something we need to do about-- about that, probably, going forward.

JIM GLASSMAN:
So just-- just to be clear, what-- what's regulation N.M.S.?

CAMERON SMITH:
Well, regulation N.M.S.-- among its many impacts was a rule tried-- that was attempting to insure that customers get the best price. But also part of it-- it had the effect of causing markets to go electronic. Which I think is generally a very good thing. But part-- also part of it is there's-- there's some concepts where you have to always route to the best price, which-- gets a little complex, but it-- it causes there to be a proliferation in markets, because of-- of-- of this obligation to route to the best price and because of-- inability to-- charge different prices to different customers. So you have-- again, it gets kind of complex, but you've had the proliferation of markets-- they were gone from one or two markets now to-- to-- if you start counting dark pools, you can get up into 40 or so.

TED KAUFMAN:
And to make it more difficult, as Cameron said earlier, there's this whole dark pool. I mean, we got to-- it isn't just high frequency trading, it's high frequency trading in an environment, where we have, you know, 40-- over 40 dark pools-- 14--

JIM GLASSMAN:
What is a dark pool?

TED KAUFMAN:
Well, a dark pool-- a dark pool is-- is-- is a way that you can trade where you don't have to trade on exchanges. The easiest way I can put it. The simplest way for folks--

CAMERON SMITH:
Yeah, it's called a "dark pool", because it doesn't disseminate. Because of regulatory reasons, it's bids and offers. So you don't really know what's in it. You just send your order in there and you say-- "Only execute me if I get, you know, a certain price," and it will. But I-- I-- I'd like to go back, actually, to this whole-- issue of-- fraud and-- and-- and the like. Put this in context. As Adam-- 'cause Adam said something earlier that I think-- you know, it gets lost in this conversation, 'cause we're rightly diving into the details, and we-- when we certainly should.

But by every measure-- you know, 'cause-- let's say we go to the doctor, right? We get our cholesterol checked. We get our HDL and get all these things checked. We have certain measures of health, right? We have very similar things in markets. We-- we-- we know about spreads and costs for-- we say a mythical institution who has to trade 500,000 shares. How much does that cost him? And we compare these costs over time. And by every measure, the markets have never been healthier. So--

JIM GLASSMAN:
Right, but Ted is talking about something else, which is-- could a bolt from the blue-- a cataclysmic event that could occur even if all these other metrics look pretty good.

CAMERON SMITH:
Of course, but I wanted to make sure we kept the context. But I'm happy to talk about the flash crash, if that's what--

JIM GLASSMAN:
Well, actually, let-- let-- let's talk about the flash crash. And the S.E.C. did determine that the flash crash-- was not-- caused by high frequency trading.

TED KAUFMAN:
Yeah, no, I think that they--

JIM GLASSMAN:
Isn't that correct?

TED KAUFMAN:
--Came out, but there's a lot of people that don't believe that was right. The main message I got out of the flash crash studies. It took six months to get it. Because I'm not, like, demonizing high frequency trading. What I'm basically saying is it's got to be regulated, folks. And if we don't know what's going on in this thing, then we can have all these-- appearances. And the real-- the way I got started on this, Jim, was my concern about the-- the-- the-- the amount of credibility of our-- our financial markets. I mean, Kellogg just came out with a report that said only 23% of the people trust our financial markets.

JIM GLASSMAN:
Kellogg Business School?

TED KAUFMAN:
Kellogg Business School. And, you know, that-- that to me is-- two things made this country great. One was democracy and the other was our financial markets.

JIM GLASSMAN:
Perhaps some of these machine-made algorithms, if you get into a bad situation, could-- the-- the flash crash, which was a thousand point drop in a few minutes, I mean, that-- that-- that could happen in-- at-- in multiples.

CAMERON SMITH:
Yeah, but the-- I think the lesson of the flash crash was the danger of when you have an automated market, which doesn't have a human there to stop it. And actually, the U.S. equity market is the only equity-- I mean, we trade globally-- in every asset class pretty much. And it's the only market I can think of that does not have some kind of circuit breaker-- some kind of bumper, in a sense.

So if it starts to go down, something kicks in at the exchange level. It was the only market-- in fact, on the day of the flash crash itself, this was made completely obvious when the-- both the C.M.E., the futures market, was heading down, the equities market was heading down, and then a mere five second pause and the C.M.E. marked the bottom, a five second pause.

JIM GLASSMAN:
C.M.E.?

CAMERON SMITH:
The Chicago Mercantile Exchange-- the main futures market. And that rebounded it. That was the bottom of it. There was no issue. We might not even be talking about the flash crash if there was a similar sort of safety pause in the equity markets. But there wasn't. Again, it was the only market that didn't have one. The S.E.C. has quickly moved in and implemented what they call circuit breakers.

So I think that's going to be a big help. And I think that would alleviate-- you can get all the benefits, 'cause I think-- 99% of the time, there's no question that automated trading's more efficient. It's going to-- it provide-- better prices for everybody. If you're worried about this 1%, where you're going to have a big move, then-- then-- then I think that's where you can put in these bumpers and the like that-- that replicate what a specialist would have done. 'Cause what would a specialist do if the market was really moving? He'd call a time out, pause, order imbalance, where should I reopen this market? He'd just-- so--And we can replicate that.

JIM GLASSMAN:
We do have those-- those time outs, right, built into the system?

TED KAUFMAN:
Yeah, but-- but-- but my point is there aren't any more specialists controlling it. There aren't any market makers. There's nobody to do this. This isn't just a problem with the computers, it's a problem of the-- as we talked to start out the show, talking about dark pools, the market structures, the total market structure problem. And that's what I've been trying to get the S.E.C. to do is there's been incredible change in the number of dark pools we have. There's been-- everything used to be controlled in the markets. There was-- we had market makers.

We made all these changes. And then high frequency trading is just one of the elements that's really had dramatic change. E-- even if you look at each one of these in their own place, you have to look at what the interaction of them are. And I-- and I'm-- I think the S.E.C. has not been-- for a number of reasons, has-- has not-- has not been as forthcoming as they could. And while--

JIM GLASSMAN:
So the-- so the S.E.C.-- so this is really-- a failure on the part of the S.E.C.?

TED KAUFMAN:
No, the-- the-- the S.E.C., for instance-- Mary Schapiro talked about consolidated audit trail.

JIM GLASSMAN:
She's the head of the S.E.C.

TED KAUFMAN:
Yeah, what, two years ago? She said she-- we should implement-- a consolidated audit trail. Here we are and we still haven't, you know, put it in place. We keep talking about it. And there are problems, as Adam said, about financing and the rest of it. But meanwhile, we let two years go by where we still don't know what's going on in-- in-- in the market. And when I talk to some of the leaders in-- in the exchanges-- in-- in the-- regulatory agency, they say it's going to be three years minimum to get the consolidated audit trail in place.

JIM GLASSMAN:
What would you like to see-- on the regulatory side to-- to obviate this problem that we've got?

TED KAUFMAN:
I'd like to see anyway we can get to transparency. I believe that when you have markets-- and I agree the-- the liquidity is at-- most of the time is-- because of high frequency is extremely high. But even liquidity, what's more important is transparency and fairness, because you have to have that regulated. Because that gets back to the whole idea of how do we keep maintaining American financial markets, as credible markets, is people have to believe it's fair.

And there's-- as I said, there's loads of studies going on, around the world right now-- looking into high frequency trading, in detail. I mean, incredible studies are going to be coming out here in the next six months or so. And I just don't want to see us in a situation where our markets are not as credible as any other financial markets in the world. That is the key to-- one of the keys to our success.

CAMERON SMITH:
The senator has-- has talked about the need for a consolidated audit trail, which I wholeheartedly agree with, large reporting system. That's all good. I want the regulators to have all the information and w-- that they need, but again, I think the market's never been more transparent. And you were asking before about what are we concerned about? What kind of problems, front running and all that. Totally less likely now, because what's gone on is you've got all these-- what we call high frequency traders, unfortunately, from-- but there's no barriers to entry in this business. There's a lot of people in it. So if somebody in-- any kind of active stock is putting in quotes or otherwise up to something-- I can guarantee you there's, you know, 25 other firms who are going to make sure that that doesn't--

(OVERTALK)

JIM GLASSMAN:
But it is dominated by a few firms, isn't that right?

CAMERON SMITH:
There's plenty of-- no, there's plenty of competition and plenty of firms getting into it or--

JIM GLASSMAN:
I just--

CAMERON SMITH:
--Competing.

JIM GLASSMAN:
I did want to bring up one other issue that people complain about-- as far as high frequency trading is concerned. And that is-- that firms are paying to have their computer servers as close to the trading facilities as possible-- because-- that little millisecond if it's in California or something to get to the New York Stock Exchange can count. Is that-- is that at all disturbing? Is that, like-- kind of an extra edge--

TED KAUFMAN:
Yeah, I think-- I think--

JIM GLASSMAN:
--That people have?

TED KAUFMAN:
Yeah, no, I think-- I think, you know, when you read the reports on it, they always say, you know, "Look, this is-- you know, this is-- this is just a way for us to get better data and the rest of it." But you've got to have the-- the high-speed computer. You've got to have the algorithm. If you're mom and pop, you're not in a business of-- of-- of being able to compete with this.

So collocation causes me a problem, in terms of what we have to do-- again, back to my basic rule. Is-- does it make it fair? Do people feel-- and does it add credibility? And collocation-- we had flash orders-- which-- which I think we pretty well straightened out. It just gives the impression that somebody's look-- you know, you're playing poker and one person's looking at the cards, like, a nanosecond before the other person is. And while I'm on it, the other thing that concerns me is that, you know, 90% of the trades are cancelled. So what is going on with that? I mean, what--

JIM GLASSMAN:
What does that mean?

CAMERON SMITH:
I was hoping to answer some of the other things. But-- on that--

JIM GLASSMAN:
Well, you can answer-- anything you want.

(OVERTALK)

JIM GLASSMAN:
We're running out of time, but-- very quickly.

CAMERON SMITH:
So typically-- there-- there's certain firms that-- what they call post orders. "I want to buy." "I want to sell." Right? Like you'd post an order in-- post something in a classified ad, let's say. But they change their mind all the time about where they want the bid to be, where they want their ask to be. And there's a lot of stocks. Let's say the futures moves. They decide, "Oh, I'm going to change my bid. I'm going to change my offer."

They change it a lot. They can't control when they get executed, but they can control what prices they're quoting are. So they change their-- senator's right, they're-- you know, I'm sure there's several firms that-- out of every hundred orders they put in, 90 of them they cancel and change before they interact with some-- before somebody comes and takes them.

JIM GLASSMAN:
And you're okay with collocation?

CAMERON SMITH:
Collocation, I think, is-- bespeaks of how competitive the market is. Why am-- why are we trying to shave microseconds or milliseconds? Because we're trying so hard to compete with another firm doing the same thing. We're not competing with the individual investor. The individual investor is the big beneficiary in this. We're doing completely different things.

JIM GLASSMAN:
And why is the-- why is the-- small investor the big beneficiary?

CAMERON SMITH:
Well, we-- first of all, we see it in the empirical evidence-- execution cost for retail investors have never been lower. So it's pretty much indisputable. And-- and the reason-- we're doing-- they shouldn't be concerned about the fairness aspect is because, again, we're doing different things. We're trying to capture millisecond, second, minute-- errors in pricing. Whereas most retail investors, including me when I just trade-- when I put an order in, I just think, you know, some stock's going to go up over six months or a year and I want to be in that sector, right? I just send the order in.

I'm not thinking, "Wow, it's 9:42 and 11 seconds, I want to buy on the bid and resell it on the offer." I'm not in that business. If I wanted to get in that business, I could. You can find firms that'll pay for your collocation on that. But-- I just want to own the stock for the next 12 months. And all I want to know is when I put that order in that there's a whole bunch of people in there fighting furiously to interact with me to give me the best price. And that's what's going on.

JIM GLASSMAN:
So-- and this is-- a good way to get in the last word, Adam.

ADAM SUSSMAN:
Sure.

JIM GLASSMAN:
Where does this leave the average investor, everything that's happening now?

ADAM SUSSMAN:
Sure.

JIM GLASSMAN:
Is this something to be concerned about? Ted talks about the lack of confidence in the markets. Cameron talks about the increased liquidity, the-- the lower cost to the average investor, I guess, the tightening of the spreads. Is--

(OVERTALK)

JIM GLASSMAN:
Where is the average investor in all that?

ADAM SUSSMAN:
Honestly, I think for the-- for the average investor-- and-- and just like Ted has his-- has his favorite topic on transparency, mine would be about, you know, making sure that the IPO market and that the small cap stocks are-- you know, that there's a different market for them or that we try to focus on how we can improve the market for those stocks. 'Cause honestly, if you're a retail investor and you want to own-- you know, you want to own a large swath of the market, you should just go buy a E.T.F. right?

JIM GLASSMAN:
Exchange traded fund.

ADAM SUSSMAN:
An exchange traded fund.

JIM GLASSMAN:
An IPO is initial public offer.

ADAM SUSSMAN:
Yeah, exactly. Sorry, so-- so I think that for the retail investor, you know, the concern is, you know, are the-- are today's entrepreneurs comfortable with, you know, the market structure that we have, comfortable with, you know, the regulatory aspects of-- of having a public company so that-- you know, that it actually encourages our best companies, our fastest-growing companies to come to market.

And on terms of buying-- you know, buying an airline stock or buying Google, I mean, yeah, it's cheap. You can do it. You're going to get a good price. No problem. I mean, the fairness aspects that-- that Ted were-- that Ted was referring to, actually, I think more apply to the competition within the high frequency trading firms than for the retail investor. It's-- you know, is there-- is there transparency into, you know, how-- how different high frequency trading firms-- compete with one another and, you know, any arrangements that they might have? I think for the retail investor, it's-- it's-- again, it gets back to the fundamentals of the economy and-- and the-- and, you know, IPOs.

JIM GLASSMAN:
But not if some cataclysm occurs, the retail investor, as Ted said, is going to be--

ADAM SUSSMAN:
Yeah, but I don't think that's got--

JIM GLASSMAN:
--Pretty upset about all this.

ADAM SUSSMAN:
That's got nothing to do with high frequency trading or dark pools. That has to do with, you know, the mismanagement of our economy as a whole.

JIM GLASSMAN:
Thank you, Adam. Thank you, Cameron. And thank you, Ted. And that's it for this week's Ideas in Action. I'm Jim Glassman, thanks for watching. Keep in mind that you can watch Ideas in Action whenever and wherever you want. To watch highlights or complete programs just go to IdeasInActionTV.com or download a podcast from the iTunes store. Ideas in Action, because ideas have consequences.

ANNOUNCER:
For more information, visit us at IdeasInActionTV.com. Funding for Ideas in Action is provided by Investor's Business Daily. Every stock market cycle is led by America's never-ending stream of innovative new companies and inventions. Investor's Business Daily helps investors find these new leaders as they emerge. More information is available at Investors.com. This program is a production of Grace Creek Media and the George W. Bush Institute, which are solely responsible for its content.


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Featured Guests

Senator Ted Kaufman

(former, D-DE) Professor of Law at Duke University

Ted Kaufman is a former United States Senator from Delaware, where he served on the Foreign Relations, Armed Services, Judiciary, and Homeland Security Committees. After leaving the Senate, he became Chair of the Congressional Oversight Panel on the TARP. He was previously Vice President Joe Biden’s Chief of Staff in the Senate and was Co-Chair of his vice presidential transition. He is presently Senior Lecturing Fellow at Duke University School of Law and serves as Co-Chair of the Science Technology Engineering Math Council of Delaware and on the Board of International Institute of Education.

Cameron Smith

President, Quantlab Financial, a high frequency trading company

Mr. Smith is the President of Quant Lab Financial, a Houston based quantitative technology and trading company. Prior to joining Quantlab, Mr. Smith served as Executive Vice President and General Counsel of Instinet Incorporated. Mr. Smith’s other professional experiences include serving as Chief Strategy Officer for INET ATS, Inc., and General Counsel for the Island ECN where he was involved in many of the key market structure debates. In addition, Mr. Smith has served as a consultant to emerging financial markets in Moldova and Romania, and as Senior Counsel in the Securities and Exchange Commission’s Division of Market Regulation. Mr. Smith received his Juris Doctorate in 1991 from the Seattle University School of Law.

Adam Sussman

Director of Research at the TABB Group, a market research company

Adam Sussman joined TABB Group after serving as a senior product manager responsible for order management systems, routing and next-generation trading tools focused on the equities and options markets at Ameritrade, Inc., a brokerage industry subsidiary of Ameritrade Holding Corporation

Episode Clips

High Freq Trading Excerpt: Trying to Understand America's Markets

Cameron Smith explains why so many orders are placed and canceled and discusses the competitveness of today's markets.

High Freq Trading Excerpt: Are America's Markets Healthy?

Adam Sussman believes that America's market structure is strong, but admits more work is needed.

High Freq Trading Excerpt: The Danger of the Status Quo

Former Senator Ted Kaufman stresses the need for transparency in today's markets.