A skeptical look at Midas
Joe Saluzzi and Sal Arnuk, both of Themis Trading, have emerged as two of the most trenchant critics of our current market structure. By dint of their many media appearances and their recent book, Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio, they have taken on the biggest market issues of our day.
In a recent column in Advanced Trading, they have turned their attention to Midas, the new surveillance tool the SEC is constructing in a bid to stay abreast of modern trading. Recall that the SEC has won plaudits for its efforts to build Midas, with help from contractor Tradeworx, a well-known high frequency trading firm.
But Saluzzi and Arnuk are not jumping on the bandwagon without asking a few questions that gets to the scope and future viability of the system. Some of the questions aren't super consequential. Why did it take so long for the SEC to move down this path? Why is it going with a contractor instead of building the system from scratch itself? These are good questions, but now that the SEC is moving toward implementation, the more salient issue is how effective the system will be.
The duos poses a number of interesting questions to get a this answer, and concludes that, "While having MIDAS is better than nothing, it still will not identify many potential nefarious practices since it doesn't trace information back to the user level and it relies on only publicly available information. While CAT will be much better than MIDAS, it unfortunately is currently in the industry sausage factory and will be there for quite some time. While we really wanted to be encouraged by Chairman Walter's speech (we do think she is trying to do the right thing), unfortunately we still think that the SEC is over matched against the HFT community."
That conclusion is certainly understandable, given the SEC track record in this area. At the same time, it might be wise to reserve judgment until after the Midas and CAT are actually operational. Hopefully, they will be savvy scalable systems, befitting a firm like Tradeworx, that can morph and grow along with the modern markets. For now, I'm optimistic. -Jim