Dark Pools & HFT - TBTF? TBTR?

I have written about HFT many times before.

http://tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html

http://tradersutra.blogspot.com/2009/07/real-hft-issue.html

SO far the SEC has proposed Banning Flash Orders which is really legalized front running. What took them so long? Oh yes...it was the bloggers who came to mankind's rescue.

They have also moved into the Dark Pool Arena.

http://www.bloomberg.com/apps/news?pid=20601087&sid=azDE7Q.4qkTo

I for instance think this issue is blown out of proportion. IOI's or Indications Of Interests have been around for many many years. Dark Pools like Liquidnet and Pipeline Trading actually facilitate trading. Do they facilitate price Discovery is another question. But then again they are not registered exchanges so they are facilitating price discovery. They are there simply to match buyers with sellers at what ever price those two want to meet. Its a round about way to get to price discovery with the transparency.

So they have effectively banned flash orders. Good.
Dark Pool trade limit has been cut to .25% of daily volume. On the fence on this one.

What needs to happen is HFT systems need to be looked at very seriously. I am not saying regulate them, but they need to be researched by the SEC.

Slowly HFT have garnered some 70% of the daily market volume on all exchanges. Its the machines that trade stock all day long. Does this sound like they are slowly becoming TBTF? Are they TBTR - Too Big To Resolve?

I am all in favor of liquidity. But these programs at the moment only add volume. Do they really add liquidity? No one can make that assumption until we see a serious drop in the markets. When every one is headed for the exits, will the HFT systems be there to soak up the sellers? Its all good in up markets remember.

Lets just say for arguments sake that they do add liquidity. I am all in favor of increased liquidity, but but when it works against transparency and fairness, transparency and fairness must win.

Spreads have narrowed, but prices quickly move back and forth, and high speed professional investors are better able than retail investors to take advantage of those price impacts.

But the bigger question and concern is that HFT, left unchecked, could develop into a systemic risk, becoming simply too big and too fast to regulate. Direct access to the exchanges by hedge funds, which still are unregulated entities and which employ high frequency strategies without even the checks associated with rules applicable to broker/dealers also increasingly jeopardizes systemic stability.

I am in favor of smart effective regulation that is actually enforced. The SEC even though is a sterile organization, its all we have at the moment. They must strike a balance by looking into HFT and Dark Pools understanding them and acknowledging the role of block trading and innovation for the institutional and retail investors.

Now whats up next after this? Co Location services? Perhaps. But we cant totally strip and regulate technology all together.

REG ATS in the late 90's spawned the stated goal of transparency and equal access to prices for all. That was good but lets get something straight. Not everyone should be trading stocks. We cant go back to the old days of looking at the tape for prices. We need certain amount of technological advancement. Fairness is always subjective. Its in the eye of the beholder. Transparency is not.