Larry Tabb Sees Problems With Trading Prices and IEX (Audio)

the country's membership of the European Union. UK law prevents us from reporting on voting or discussion and analysis of referendum issues while polls are open, but we will be following all the action as results come in with special coverage. Right now, we have got the SMP five hundred index at one o eight, up twenty three points again now of one point one percent down. Industrial is up one

hundred eighty nine points up one point one percent. NAS stack up sixty eight, a gain of one point four percent. The ten year down fifteen thirty seconds, the yield one point seven three percent, Gold down six to twelve sixty three drop a point five and crude oil West Texas Intermediate of one point nine percent fifty oh seven for a barrel of West Texas Intermediate. That is a game of cents. I'm Charlie Palla. That's a Bloomberg business flash.

You're listening to Taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. The I e X. If you go to the Investors Exchange website, the i X S I e X I should say it says it's the first equity trading venue owned exclusively by a consortium of by side investors, including mutual funds, heads funds, family offices. In fact, Bread katsu Yama, the I e X co founder, says this new stock exchange will make people safer. It's

now been approved with National as a national exchange. But our next guest says he's not sure this is such a good thing for investors. Let's ask him why we're welcoming now. Larry Tab, CEO and whole founder of the Tab Group based here in New York. Larry, thanks for taking time for taking stock. Al Hi, Kathleen, thanks for having me so in your words, explain to our listeners what the I I e X was and remind is

why it was found in the first place. Well, well, first of all, hats off to those guys say there now or will be a fully fledged exchange good for them. UM. I X have founded kind of on the heels of of Michael Lewis's Flash Boys book that really talked about latency arbitrage and in picking off investors and the whole idea of that UM you know, the markets were not so safe for investors. I won't use the R word but because I don't believe in it. But but that's kind of the premise that I e x UH was

born under. And UH. One of the key foundations of their platform is a speed bump, basically a very short speed bump three and fifty microseconds each way, basically seven microseconds in and out UH to ensure that that UM UH high frequency traders don't pick off limit orders and and to a certain extent, UM it's a good premise. It works well. They've gained share UM institutional investors tend

to like them. But to a certain extent, the current market structure is has what they call out of protection rules of forced exchanges to route UM to the various exchanges and the speed bump that i X has and what I'm assuming will be multiple speed bumps. If I e X is successful, I think you'll wind up seeing multiple speed bumps and variations. Just to certain extent, the speed bump makes it more difficult for machines to find

what the right prices. So if you know one price is delayed um and everything else is in real time, you're kind of comparing apples to orange is um comparing the price of an asset the way it was microseconds to what what everybody else is displaying today? And while tiny microsoconds isn't a long time at all, machines thinking much quicker time frames these days. So it becomes really a bit challenging for the machines to find the right quote.

And that would be even more especially true if multiple speed bumps are developed. Alarright, could you just step back for a second and explain how high frequency trading works in connection with picking off limit orders and what are limit orders for those that are not in the weeds with this, Yeah, limit order is is just you know, the desire to buy a product at a certain price.

So you see a quote in the marketplace, um, and the quotes that you see I'll buy a ten and sell it ten on one, those are basically limit orders or quotes UM, and so uh, generally, what high frequency traders it's harder to find high frequency traders, but a lot of the quotes are created by market makers which tend to use high frequency trading infrastructure, are very fast infrastructure to quote because um, when they're managing quotes, you know they can there there are twelve and soon to

be thirteen exchanges and so um to make sure that their quotes are you know, precisely on target. They have to basically manage them very closely. And so if they're a bit slow on updating that quote, another person with very fast technology can come in and take out that price. It possibly the wrong price that they are, a price that they didn't want to really trade at. So it's benefits James battling machines basically well, and of course we just had a guest on just in I guess the

last couple of days. I believe it was John Manley Pam from from Wells Fargo and him asked him about high frequency trading and he said, at the end of the day for him is and he's the big big money manage the billions under management that this is or yeah, a lot of money, right, a quarter of a trillion. That is that at the end of the day, they manage money, they manage investments, and but at the end of the year, it probably doesn't make too much difference

to their customers or their portfolios. The high frequency trading, So who does it potentially? Uh, Who's who's it bad for? The challenge becomes, well, first all it's it's becomes problematic for the larger investor because to certain extent the markets are geared towards smaller orders because of the fragmented exchange infrastructure, uh, and the very tight quotes and are the type prices and quick quote um A, once you get out of a certain range, it's supplying you know, the price moves.

So if you're entering the market too strongly, it'll move the price. And that generally occurs with folks that are trading in larger size. So the second issue is that, um the people who turn over their portfolio have much

more to lose. So if I'm you know, if I if I've got a quarter of a trillions, I've got two hundred fifty trillion, let's just say billion assets under management, and my turnovers once a year all the two fifty Basically, I'm only you know, my leakage to high frequency trading only occurs, you know, you know once a year when I trade. If I'm turning over my portfolio twice a year, then it happens twice monthly, twelve times daily, two fifty times. So clearly the people have the most to lose of

the people with the highest amounts of turnover. And we're starting to see those guys invest in um much, you know, in more trading infrastructure and technology and data and the tools of services that helped them. But there is a need for something like i X for the larger investors so that they can come in and and trade in larger size. The problem is that you're holding one exchange to a very different standard than you're holding all the

other exchanges. And if you wind up, you know, holding everybody at you know, at the same level you wind up, you know, you can wind up with a ten twelve different speed bumps, in which case it's really it becomes much more difficult to determine what's the right price because every every price you're seeing is somewhat delayed, and so it won't be the large exchanges that wind up doing this. It will be like there are twelve exchanges. It's to

be thirteen. You might see like the bottom four or five you know, directly create speed bumps, and maybe the bigger ones, you know, um use some sort of order type that goes over speed bumps. So in Canada there's a market called Neo that that only certain order types go over the speed bump. It's only certain order types down. So you might see something like that occur on some

of the bigger markets. So you know, you've got to you know, so that the question will be is what will the SEC allow if a number of copycaps come in? You know, how complicated does it get? How do I find the best price? And clearly if if if the pricing mechanism becomes more difficult to determine that you know, the you know, the smaller orders will will get hurt the most because spreads are wide and because you know, they're not really sure how type the price should be.

Is this a response to market volatility? Not saying that's the correct response, but is that really what this is all? No, No, it really is actually a needed response. The problem is the is the seces Reaga n MS tries to create

a youth MS. Reagan MS is the National Market Structure rules that were created two thousand five, two thousand and six, I think the implemented two thousand and seven UM that basically UH created something called order protection, which basically says, if you send your order to a market that doesn't have the best price, the exchange that routed to the

market with the better price. And the problem with that is it creates a market structure that becomes very fast and and there's all this order routing and you know, going on behind so so right now on peak days there are millions of messages going on, very hard to manage, and to certain extent, it's all this interconnection that kind of gets challenged. Thanks for connecting the dots for us. So Larry tab is the chief executive and the founder of TAB Group, giving us some details about I e X,

the new stock exchange. You're listening to taking Stock. I'm pim Fox my co host Kathleen Hayes. This is Bloomberg Radio.