Given that GETCO already was a major liquidity provider on the NYSE, sell-side firms view the change as a natural evolution of the firm's role. "This is just another step in the full integration of electronic trading and high-frequency market making into the exchange world," observes Joe Gawronski, president and COO of Rosenblatt Securities, an institutional agency broker that specializes in market structure analysis.
"Obviously they're already involved," says Gawronski, who notes that high-frequency trading already accounts for one-half to two-thirds of U.S. equity trading volume. "But to make one of the leading [high-frequency trading] firms a DMM -- it's sort of like taking HFT out of the shadows and bringing it into the light under the mantle of the NYSE," he adds, noting that the move may make HFT more legitimate in certain critics' eyes.
Nonetheless, buy-side firms want to know how separate the DMM role is from the proprietary trading business of the overall firm, which is permitted to pursue other trading strategies. "Clients want to understand the precise relationship between GETCO's primary market making businesses and their NYSE DMM unit," says the anonymous sell-side trading executive.
Others question whether HFT shops provide liquidity to small and mid-cap stocks or only to the top 100 large caps.
That view is "misinformed," GETCO's Babulak insists, pointing out that the firm is active in 2,500 stocks every day. "We have a pretty deep market penetration." According to Babulak, GETCO is obligated to quote in a number of stocks that have an average daily volume of less than 50,000 shares a day.
In fact, some buy-side traders are less skeptical. Gus Sauter, chief investment officer at Vanguard, which manages about $1.4 trillion in mutual fund assets, says he doesn't think high-frequency traders deserve the black eye they've been given. "I don't see this as a negative development. This is sort of a natural evolution," he comments. "GETCO has been serving as a supplemental liquidity provider on the exchange, so to move to a DMM is an incremental step and one that we hope will be sufficiently monitored."
Sauter emphasizes that Vanguard performs it's own monitoring as well, regardless of the firm with which it is trading. "You always have to monitor the trading that you do, and make sure you're getting best execution and make sure you're not being gamed," he says.
In Sauter's view, it really comes down to trusting the NYSE to police the new breed of electronic market makers. "It's got nothing to do with GETCO. If the NYSE had any problems with this model, the exchange would have a lot to lose," he says.
"We are already highly regulated," GETCO's Babulak responds. "As a registered broker-dealer, we're regulated by the SEC and CFTC. Regulated markets are important. We're out there -- posting orders for other people to trade with. As a market maker, we need well-regulated markets."
Obligations and Privileges Amid HFT Concerns
Rosenblatt's Gawronski notes that because GETCO has obligations as a DMM that it didn't have in its SLP role, there could be benefits to the broader market of having the firm serve as a DMM. "There are obligations and privileges that come with the DMM role," Gawronski says. "They certainly have more obligations than an SLP. You have to deal with the corporate issuer's management, there are certain responsibilities at the open and the close, and requirements of how often you have to quote at the NBBO."
Of course, serving as a DMM can significantly add to GETCO's profitability as well. The DMMs receive a higher rebate for supplying liquidity than any other class of exchange member -- 30 cents per 100 shares versus 17 cents for SLPs.
"I've been pounding the table that high-frequency traders need to legitimize themselves," Federated Investors' Setzenfand says, noting that one of the criticisms against high-frequency traders is that they don't have obligations as a market maker. "If you want them to be counted, registered, identified, this is kind of a step in the right direction. Yes, they get benefits, [but] they actually have obligations they didn't have before."
Still, there is a certain shroud over electronic market makers and how their obligations will work with high-frequency trading to drive profits that seems to instill fear in the buy side. "As a market maker, we post two-sided markets," explains GETCO's Babulak. "Other people buy and we sell it to them, and if we do our job correctly, we manage to hang onto a little piece of the bid/asked spread."