The Economy

I wish Citadel wasn't doing a disingenuous, "We are in this for retail investors" campaign.

They are in it because they have a business that makes them a lot of money, playing in between the bid and ask on financial transactions. ... using fiber optic lines and computers. The fact that retail investors have benefited a great deal from the role that high-frequency trading market makers like Citadel play is a fact, but it's not the reason Citadel is in it.

They are a market maker. They provide liquidity to markets by agreeing to always be there to buy or sell a security when people want to transact. They make fractions of pennies on the vast majority of transactions where they play that role. As a result of the high-frequency trading that they do, our markets are more liquid than they have ever been. Spreads are as a tight as a snare drum. Executions are lightning fast. The money that market makers earn is miniscule compared to what it was at any time before. They do it on high volume now. With many brokers going to payment for order flow models, a lot of investors get those tight spreads and fast executions without having to pay a commission. The fraction of a penny that Citadel might earn is the only cost for the transaction. NOTHING is free. It costs something to induce market makers to provide liquidity to markets. This used to be known as progress. It should be seen as an example of technology left unfettered bringing down costs of something and benefitting people hugely. The transaction costs on financial transactions for Joe Blow have come down to almost nothing.

Instead. ... the market makers (which have ALWAYS existed, they were just specialists standing on a floor of a stock exchange being guaranteed a way bigger amount on a much bigger spread) are now being demonized in a display of bullshit populism.

The alternative is that people pay high commissions the way they used to. Or that we outlaw high frequency trading and ECNs and we go back to spreads on stocks that you can drive a truck through, so that retail investors see slippage of 10s of cents or even dollars intsead of a fraction of a cent when they buy or sell something.

It's stupid and backward, but the Elizabeth Warren types have their issue and they have formed a mob and the SEC is pursuing this stupidity, because Gary Gensler is a moron. This is the kind of populism that ends up screwing people. I wish they would go the fuck away.

 

FYI, I should add. ... in that little rant, I wasn't talking about what Citadel is doing with this particular lawsuit. They are full of shit, and obviously what they are doing is self serving. They are not trying to protect retail investors. They are trying to force regulation that benefits them instead of hurting them.

I have nothing against IEX and D-Limit or Brad Katsuyama. The fact that the SEC is in there picking winners and losers, instead of letting people choose for themselves how they want to transact is the problem. In an ideal world, IEX would be free to operate without the SEC deciding it. And Citadel would get laughed out of court if it tried to bring any sort of suit to stop IEX.

Then the market itself could decide if IEX makes sense for people. The technology itself is a bit iffy to me, because a free market by definition has a level field or table. And their technology tries to stack things against people doing arbitrage. Which is why it has the potential to put Citadel out of business. I also think that IEX should just be allowed to operate unfettered, and if (and I suspect it will) it proves more costly in the aggregate, the market should decide its fate. Compete, don't rely on a regulator, or courts if the regulator doesn't give you what you want, to pick winners and losers.