1 00:00:03,200 --> 00:00:06,560 Speaker 1: Global business news twenty four hours a day. If Bloomberg 2 00:00:06,640 --> 00:00:09,720 Speaker 1: dot Com, the radio plus mobile and on your radio. 3 00:00:10,000 --> 00:00:14,520 Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters. 4 00:00:14,560 --> 00:00:18,279 Speaker 1: I'm Charlie Pellett's stocks are moving higher. We've got the 5 00:00:18,480 --> 00:00:22,479 Speaker 1: SMP five hundred index heading for its strongest gain in 6 00:00:22,760 --> 00:00:25,840 Speaker 1: a month. UK citizens voting today and a referendum on 7 00:00:25,880 --> 00:00:30,200 Speaker 1: the country's membership of the European Union. UK law prevents 8 00:00:30,240 --> 00:00:33,680 Speaker 1: us from reporting on voting or discussion and analysis of 9 00:00:33,720 --> 00:00:36,559 Speaker 1: referendum issues while polls are open, but we will be 10 00:00:36,600 --> 00:00:41,160 Speaker 1: following all the action as results come in with special coverage. 11 00:00:41,240 --> 00:00:43,520 Speaker 1: Right now, we have got the SMP five hundred index 12 00:00:43,560 --> 00:00:46,240 Speaker 1: at one o eight, up twenty three points again now 13 00:00:46,560 --> 00:00:49,559 Speaker 1: of one point one percent down. Industrial is up one 14 00:00:49,640 --> 00:00:52,880 Speaker 1: hundred eighty nine points up one point one percent. NAS 15 00:00:52,960 --> 00:00:55,640 Speaker 1: stack up sixty eight, a gain of one point four percent. 16 00:00:56,080 --> 00:00:58,720 Speaker 1: The ten year down fifteen thirty seconds, the yield one 17 00:00:58,760 --> 00:01:03,360 Speaker 1: point seven three percent, Gold down six to twelve sixty 18 00:01:03,400 --> 00:01:06,959 Speaker 1: three drop a point five and crude oil West Texas 19 00:01:07,000 --> 00:01:10,160 Speaker 1: Intermediate of one point nine percent fifty oh seven for 20 00:01:10,160 --> 00:01:13,440 Speaker 1: a barrel of West Texas Intermediate. That is a game 21 00:01:13,480 --> 00:01:18,520 Speaker 1: of cents. I'm Charlie Palla. That's a Bloomberg business flash. 22 00:01:18,760 --> 00:01:21,760 Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim 23 00:01:21,880 --> 00:01:26,360 Speaker 1: Fox on Bloomberg Radio. The I e X. If you 24 00:01:26,520 --> 00:01:30,000 Speaker 1: go to the Investors Exchange website, the i X S 25 00:01:30,680 --> 00:01:32,440 Speaker 1: I e X I should say it says it's the 26 00:01:32,480 --> 00:01:35,959 Speaker 1: first equity trading venue owned exclusively by a consortium of 27 00:01:36,000 --> 00:01:40,720 Speaker 1: by side investors, including mutual funds, heads funds, family offices. 28 00:01:41,040 --> 00:01:44,680 Speaker 1: In fact, Bread katsu Yama, the I e X co founder, 29 00:01:44,800 --> 00:01:48,280 Speaker 1: says this new stock exchange will make people safer. It's 30 00:01:48,320 --> 00:01:51,440 Speaker 1: now been approved with National as a national exchange. But 31 00:01:51,480 --> 00:01:54,600 Speaker 1: our next guest says he's not sure this is such 32 00:01:54,600 --> 00:01:57,640 Speaker 1: a good thing for investors. Let's ask him why we're 33 00:01:57,880 --> 00:02:00,960 Speaker 1: welcoming now. Larry Tab, CEO and whole founder of the 34 00:02:01,000 --> 00:02:04,080 Speaker 1: Tab Group based here in New York. Larry, thanks for 35 00:02:04,120 --> 00:02:07,600 Speaker 1: taking time for taking stock. Al Hi, Kathleen, thanks for 36 00:02:07,640 --> 00:02:11,120 Speaker 1: having me so in your words, explain to our listeners 37 00:02:11,360 --> 00:02:14,360 Speaker 1: what the I I e X was and remind is 38 00:02:14,840 --> 00:02:17,919 Speaker 1: why it was found in the first place. Well, well, 39 00:02:17,960 --> 00:02:20,200 Speaker 1: first of all, hats off to those guys say there 40 00:02:20,280 --> 00:02:26,240 Speaker 1: now or will be a fully fledged exchange good for them. UM. 41 00:02:26,520 --> 00:02:29,480 Speaker 1: I X have founded kind of on the heels of 42 00:02:29,480 --> 00:02:33,400 Speaker 1: of Michael Lewis's Flash Boys book that really talked about 43 00:02:33,880 --> 00:02:37,880 Speaker 1: latency arbitrage and in picking off investors and the whole 44 00:02:37,919 --> 00:02:41,000 Speaker 1: idea of that UM you know, the markets were not 45 00:02:41,080 --> 00:02:44,320 Speaker 1: so safe for investors. I won't use the R word 46 00:02:44,360 --> 00:02:48,560 Speaker 1: but because I don't believe in it. But but that's 47 00:02:48,600 --> 00:02:51,400 Speaker 1: kind of the premise that I e x UH was 48 00:02:51,480 --> 00:02:56,320 Speaker 1: born under. And UH. One of the key foundations of 49 00:02:56,400 --> 00:02:59,760 Speaker 1: their platform is a speed bump, basically a very short 50 00:03:00,040 --> 00:03:03,919 Speaker 1: speed bump three and fifty microseconds each way, basically seven 51 00:03:04,120 --> 00:03:10,680 Speaker 1: microseconds in and out UH to ensure that that UM 52 00:03:11,000 --> 00:03:16,600 Speaker 1: UH high frequency traders don't pick off limit orders and 53 00:03:16,600 --> 00:03:19,640 Speaker 1: and to a certain extent, UM it's a good premise. 54 00:03:19,960 --> 00:03:24,920 Speaker 1: It works well. They've gained share UM institutional investors tend 55 00:03:24,960 --> 00:03:29,800 Speaker 1: to like them. But to a certain extent, the current 56 00:03:29,840 --> 00:03:35,440 Speaker 1: market structure is has what they call out of protection 57 00:03:35,520 --> 00:03:40,760 Speaker 1: rules of forced exchanges to route UM to the various 58 00:03:40,840 --> 00:03:45,040 Speaker 1: exchanges and the speed bump that i X has and 59 00:03:45,440 --> 00:03:48,440 Speaker 1: what I'm assuming will be multiple speed bumps. If I 60 00:03:48,600 --> 00:03:51,320 Speaker 1: e X is successful, I think you'll wind up seeing 61 00:03:51,360 --> 00:03:55,640 Speaker 1: multiple speed bumps and variations. Just to certain extent, the 62 00:03:55,680 --> 00:03:58,760 Speaker 1: speed bump makes it more difficult for machines to find 63 00:03:58,760 --> 00:04:02,120 Speaker 1: what the right prices. So if you know one price 64 00:04:02,240 --> 00:04:05,800 Speaker 1: is delayed um and everything else is in real time, 65 00:04:06,400 --> 00:04:09,160 Speaker 1: you're kind of comparing apples to orange is um comparing 66 00:04:09,280 --> 00:04:14,480 Speaker 1: the price of an asset the way it was microseconds 67 00:04:14,560 --> 00:04:19,400 Speaker 1: to what what everybody else is displaying today? And while 68 00:04:19,440 --> 00:04:23,880 Speaker 1: tiny microsoconds isn't a long time at all, machines thinking 69 00:04:24,240 --> 00:04:27,400 Speaker 1: much quicker time frames these days. So it becomes really 70 00:04:27,960 --> 00:04:31,760 Speaker 1: a bit challenging for the machines to find the right quote. 71 00:04:31,760 --> 00:04:36,320 Speaker 1: And that would be even more especially true if multiple 72 00:04:36,360 --> 00:04:40,960 Speaker 1: speed bumps are developed. Alarright, could you just step back 73 00:04:41,000 --> 00:04:44,480 Speaker 1: for a second and explain how high frequency trading works 74 00:04:44,480 --> 00:04:47,240 Speaker 1: in connection with picking off limit orders and what are 75 00:04:47,320 --> 00:04:50,000 Speaker 1: limit orders for those that are not in the weeds 76 00:04:50,000 --> 00:04:53,640 Speaker 1: with this, Yeah, limit order is is just you know, 77 00:04:53,680 --> 00:04:56,719 Speaker 1: the desire to buy a product at a certain price. 78 00:04:56,760 --> 00:05:00,680 Speaker 1: So you see a quote in the marketplace, um, and 79 00:05:01,240 --> 00:05:04,000 Speaker 1: the quotes that you see I'll buy a ten and 80 00:05:04,040 --> 00:05:07,120 Speaker 1: sell it ten on one, those are basically limit orders 81 00:05:07,200 --> 00:05:13,760 Speaker 1: or quotes UM, and so uh, generally, what high frequency 82 00:05:13,760 --> 00:05:18,039 Speaker 1: traders it's harder to find high frequency traders, but a 83 00:05:18,120 --> 00:05:20,880 Speaker 1: lot of the quotes are created by market makers which 84 00:05:20,920 --> 00:05:25,200 Speaker 1: tend to use high frequency trading infrastructure, are very fast 85 00:05:25,240 --> 00:05:30,880 Speaker 1: infrastructure to quote because um, when they're managing quotes, you 86 00:05:30,920 --> 00:05:33,760 Speaker 1: know they can there there are twelve and soon to 87 00:05:33,800 --> 00:05:37,640 Speaker 1: be thirteen exchanges and so um to make sure that 88 00:05:37,680 --> 00:05:41,320 Speaker 1: their quotes are you know, precisely on target. They have 89 00:05:41,400 --> 00:05:46,040 Speaker 1: to basically manage them very closely. And so if they're 90 00:05:46,040 --> 00:05:50,360 Speaker 1: a bit slow on updating that quote, another person with 91 00:05:50,480 --> 00:05:54,480 Speaker 1: very fast technology can come in and take out that price. 92 00:05:54,680 --> 00:05:57,159 Speaker 1: It possibly the wrong price that they are, a price 93 00:05:57,240 --> 00:06:00,760 Speaker 1: that they didn't want to really trade at. So it's 94 00:06:00,760 --> 00:06:05,359 Speaker 1: benefits James battling machines basically well, and of course we 95 00:06:05,440 --> 00:06:07,600 Speaker 1: just had a guest on just in I guess the 96 00:06:07,680 --> 00:06:10,039 Speaker 1: last couple of days. I believe it was John Manley 97 00:06:10,080 --> 00:06:14,279 Speaker 1: Pam from from Wells Fargo and him asked him about 98 00:06:14,720 --> 00:06:16,920 Speaker 1: high frequency trading and he said, at the end of 99 00:06:16,920 --> 00:06:18,680 Speaker 1: the day for him is and he's the big big 100 00:06:18,680 --> 00:06:23,080 Speaker 1: money manage the billions under management that this is or yeah, 101 00:06:23,120 --> 00:06:25,520 Speaker 1: a lot of money, right, a quarter of a trillion. 102 00:06:25,600 --> 00:06:28,479 Speaker 1: That is that at the end of the day, they 103 00:06:28,560 --> 00:06:31,920 Speaker 1: manage money, they manage investments, and but at the end 104 00:06:31,920 --> 00:06:33,680 Speaker 1: of the year, it probably doesn't make too much difference 105 00:06:33,680 --> 00:06:37,599 Speaker 1: to their customers or their portfolios. The high frequency trading, 106 00:06:37,640 --> 00:06:41,440 Speaker 1: So who does it potentially? Uh, Who's who's it bad for? 107 00:06:42,400 --> 00:06:46,800 Speaker 1: The challenge becomes, well, first all it's it's becomes problematic 108 00:06:46,920 --> 00:06:49,719 Speaker 1: for the larger investor because to certain extent the markets 109 00:06:49,720 --> 00:06:55,000 Speaker 1: are geared towards smaller orders because of the fragmented exchange infrastructure, uh, 110 00:06:55,040 --> 00:06:57,880 Speaker 1: and the very tight quotes and are the type prices 111 00:06:57,960 --> 00:07:03,280 Speaker 1: and quick quote um A, once you get out of 112 00:07:03,520 --> 00:07:07,159 Speaker 1: a certain range, it's supplying you know, the price moves. 113 00:07:07,320 --> 00:07:11,440 Speaker 1: So if you're entering the market too strongly, it'll move 114 00:07:11,480 --> 00:07:14,160 Speaker 1: the price. And that generally occurs with folks that are 115 00:07:14,200 --> 00:07:18,880 Speaker 1: trading in larger size. So the second issue is that, 116 00:07:19,800 --> 00:07:24,840 Speaker 1: um the people who turn over their portfolio have much 117 00:07:24,840 --> 00:07:26,880 Speaker 1: more to lose. So if I'm you know, if I 118 00:07:27,280 --> 00:07:29,400 Speaker 1: if I've got a quarter of a trillions, I've got 119 00:07:29,400 --> 00:07:34,360 Speaker 1: two hundred fifty trillion, let's just say billion assets under management, 120 00:07:34,400 --> 00:07:42,320 Speaker 1: and my turnovers once a year all the two fifty Basically, 121 00:07:42,320 --> 00:07:45,680 Speaker 1: I'm only you know, my leakage to high frequency trading 122 00:07:45,720 --> 00:07:48,720 Speaker 1: only occurs, you know, you know once a year when 123 00:07:48,720 --> 00:07:52,520 Speaker 1: I trade. If I'm turning over my portfolio twice a year, 124 00:07:52,560 --> 00:07:58,040 Speaker 1: then it happens twice monthly, twelve times daily, two fifty times. 125 00:07:58,520 --> 00:08:01,040 Speaker 1: So clearly the people have the most to lose of 126 00:08:01,160 --> 00:08:04,840 Speaker 1: the people with the highest amounts of turnover. And we're 127 00:08:04,840 --> 00:08:09,720 Speaker 1: starting to see those guys invest in um much, you know, 128 00:08:10,120 --> 00:08:14,560 Speaker 1: in more trading infrastructure and technology and data and the 129 00:08:14,600 --> 00:08:18,920 Speaker 1: tools of services that helped them. But there is a 130 00:08:18,960 --> 00:08:22,840 Speaker 1: need for something like i X for the larger investors 131 00:08:22,840 --> 00:08:25,520 Speaker 1: so that they can come in and and trade in 132 00:08:25,600 --> 00:08:29,400 Speaker 1: larger size. The problem is that you're holding one exchange 133 00:08:29,600 --> 00:08:32,720 Speaker 1: to a very different standard than you're holding all the 134 00:08:32,720 --> 00:08:36,000 Speaker 1: other exchanges. And if you wind up, you know, holding 135 00:08:36,000 --> 00:08:39,480 Speaker 1: everybody at you know, at the same level you wind up, 136 00:08:39,640 --> 00:08:42,160 Speaker 1: you know, you can wind up with a ten twelve 137 00:08:42,200 --> 00:08:45,400 Speaker 1: different speed bumps, in which case it's really it becomes 138 00:08:45,520 --> 00:08:49,120 Speaker 1: much more difficult to determine what's the right price because 139 00:08:49,240 --> 00:08:53,040 Speaker 1: every every price you're seeing is somewhat delayed, and so 140 00:08:53,080 --> 00:08:55,520 Speaker 1: it won't be the large exchanges that wind up doing this. 141 00:08:55,559 --> 00:08:59,280 Speaker 1: It will be like there are twelve exchanges. It's to 142 00:08:59,320 --> 00:09:02,360 Speaker 1: be thirteen. You might see like the bottom four or 143 00:09:02,400 --> 00:09:05,960 Speaker 1: five you know, directly create speed bumps, and maybe the 144 00:09:05,960 --> 00:09:09,560 Speaker 1: bigger ones, you know, um use some sort of order 145 00:09:09,600 --> 00:09:12,840 Speaker 1: type that goes over speed bumps. So in Canada there's 146 00:09:12,880 --> 00:09:17,680 Speaker 1: a market called Neo that that only certain order types 147 00:09:17,720 --> 00:09:20,560 Speaker 1: go over the speed bump. It's only certain order types down. 148 00:09:21,200 --> 00:09:23,280 Speaker 1: So you might see something like that occur on some 149 00:09:23,320 --> 00:09:25,920 Speaker 1: of the bigger markets. So you know, you've got to 150 00:09:26,040 --> 00:09:28,200 Speaker 1: you know, so that the question will be is what 151 00:09:28,320 --> 00:09:32,680 Speaker 1: will the SEC allow if a number of copycaps come in? 152 00:09:33,400 --> 00:09:36,080 Speaker 1: You know, how complicated does it get? How do I 153 00:09:36,160 --> 00:09:40,400 Speaker 1: find the best price? And clearly if if if the 154 00:09:40,480 --> 00:09:45,120 Speaker 1: pricing mechanism becomes more difficult to determine that you know, 155 00:09:45,160 --> 00:09:48,160 Speaker 1: the you know, the smaller orders will will get hurt 156 00:09:48,480 --> 00:09:51,120 Speaker 1: the most because spreads are wide and because you know, 157 00:09:51,120 --> 00:09:53,240 Speaker 1: they're not really sure how type the price should be. 158 00:09:54,960 --> 00:09:59,000 Speaker 1: Is this a response to market volatility? Not saying that's 159 00:09:59,000 --> 00:10:01,720 Speaker 1: the correct response, but is that really what this is all? No, No, 160 00:10:01,880 --> 00:10:05,000 Speaker 1: it really is actually a needed response. The problem is 161 00:10:05,040 --> 00:10:09,200 Speaker 1: the is the seces Reaga n MS tries to create 162 00:10:09,440 --> 00:10:14,680 Speaker 1: a youth MS. Reagan MS is the National Market Structure 163 00:10:14,800 --> 00:10:18,240 Speaker 1: rules that were created two thousand five, two thousand and six, 164 00:10:18,480 --> 00:10:21,439 Speaker 1: I think the implemented two thousand and seven UM that 165 00:10:21,600 --> 00:10:26,320 Speaker 1: basically UH created something called order protection, which basically says, 166 00:10:26,320 --> 00:10:29,120 Speaker 1: if you send your order to a market that doesn't 167 00:10:29,160 --> 00:10:32,319 Speaker 1: have the best price, the exchange that routed to the 168 00:10:32,840 --> 00:10:35,880 Speaker 1: market with the better price. And the problem with that 169 00:10:36,040 --> 00:10:39,680 Speaker 1: is it creates a market structure that becomes very fast 170 00:10:40,520 --> 00:10:44,160 Speaker 1: and and there's all this order routing and you know, 171 00:10:44,240 --> 00:10:47,559 Speaker 1: going on behind so so right now on peak days 172 00:10:47,760 --> 00:10:50,400 Speaker 1: there are millions of messages going on, very hard to manage, 173 00:10:51,120 --> 00:10:53,600 Speaker 1: and to certain extent, it's all this interconnection that kind 174 00:10:53,600 --> 00:10:57,120 Speaker 1: of gets challenged. Thanks for connecting the dots for us. 175 00:10:57,120 --> 00:10:59,680 Speaker 1: So Larry tab is the chief executive and the founder 176 00:11:00,080 --> 00:11:04,520 Speaker 1: of TAB Group, giving us some details about I e X, 177 00:11:04,679 --> 00:11:08,160 Speaker 1: the new stock exchange. You're listening to taking Stock. I'm 178 00:11:08,200 --> 00:11:11,720 Speaker 1: pim Fox my co host Kathleen Hayes. This is Bloomberg Radio.