Vanguard Group Inc., the world’s largest mutual-fund company, said only a minority of high-frequency traders may be hurting other investors.
Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.
“There are high-frequency traders that probably unfairly tax the system by taking it too far,” Brennan said. “We’re in favor of market structure rules that continue to evolve to make sure liquidity providers are just that, and get paid for liquidity and nothing more.”
Money managers such as Vanguard, which buy and sell trillions of dollars worth of stocks on behalf of their investors, for years have sought to determine the impact of high-frequency trading on the assets they run. Vanguard, which handles more than $2 trillion, has been waging a battle to make sure it gets the best prices possible for its funds, Brennan said, using its own computer software and other tactics. Capital Group Cos., with $1.14 trillion in assets, has backed a startup exchange that seeks to protect investors from predatory traders.
High-frequency traders have come under unprecedented scrutiny after author Michael Lewis published “Flash Boys,” a book released March 31 that says high-speed traders, Wall Street brokerages and exchanges have rigged the $23 trillion U.S. stock market. New York Attorney General Eric Schneiderman is examining privileges such as enhanced data feeds marketed to high-speed firms, while the Federal Bureau of Investigation is looking into whether those traders are breaking U.S. laws by acting on nonpublic information.
‘Aha’ Moment
“Unfortunately this is coming out in a way that looks like a brand new thing, and an ‘Aha’ moment on ‘60 Minutes’,” Brennan said, referring to Lewis’s interview on the television program that aired March 30. “Honestly, we’ve been working to improve market structure through regulators, with brokers and exchanges for years. This is an ongoing piece of work.”
Lewis’s book centers around Brad Katsuyama, president and chief executive officer of IEX Group Inc., an exchange that opened in October. While IEX welcomes high-frequency traders as market makers, the firm has curbs that slow the pace of buying and selling. It’s pitching itself as a haven for asset managers who want protection from trading practices they consider predatory.
IEX Backers
IEX doesn’t allow brokerages to own stakes in the company, an attempt to prevent conflicts of interest. Money managers including Capital Group, David Einhorn’s Greenlight Capital Inc. and Bill Ackman’s Pershing Square Capital Management LP are shareholders.