High Frequency Trading Review


    An Interview with Dave Lauer

    There are many industry participants and observers who would agree that the US Equity market structure has become overly – and unnecessarily – complex. The combination of regulatory changes, technology developments and changes to market microstructure over the last decade have led to a point where there is a now a delicate balance between the markets operating efficiently and unexpected events occurring that seriously dent people’s confidence, such as the May 2010 Flash Crash, the Knight Capital disruption in August 2012 and the problematic IPOs of Facebook and BATS, also in 2012.

    In this interview, Dave Lauer (@DLauer), a Market Structure and Technology Architecture Consultant with extensive experience in designing and building HFT systems who has testified before the Senate Banking Committee and appeared on SEC Panels, shares his thoughts on what is wrong with the US equity market structure today and how things might be improved.

    HFTR: Dave, welcome to HFT Review. You have an interesting background in that you used to be a high frequency trader, you then took yourself out of what you saw as the “rat race”, and now you are a regular commentator on and advisor to the industry. So can you tell me a bit about your history?

    DL: I studied computer science as an undergraduate, got a masters in finance and basically always wanted to work in startups (this was during the dotcom years). One of my first jobs out of college – and my introduction to Wall Street – was working at a company called Tervela. I was the third employee there and we built a hardware message routing appliance specifically targeting market data and FIX.  While I was there I also wrote some white papers and articles on low latency, high performance design. 

    After a few years of working with HFT desks and seeing all these guys making so much money, I decided I wanted to be on the other side, so I left Tervela and moved to Chicago to work at Citadel in their high frequency trading division, building out a new HFT desk there with a friend of mine who was running the desk.  That was an interesting experience.  It only lasted nine months before they laid off our whole desk and we all went across to Allston Trading, still in Chicago. I stayed there about a year and a half, specialising in quantitative research and trading, doing the whole thing from researching strategies to programming them to running and trading them. I mainly specialized in low-latency trading strategies. .  

    HFTR: Why did you decide to get out?

    DL: I think it was really the Flash Crash in May 2010. I was on the trading desk and that experience really opened my eyes. I started rethinking what I was doing and whether it was making markets better or not and whether things were improving or actually becoming more fragile. A little less than a year after the Flash Crash my wife got pregnant, which is when I started to rethink everything. And I decided it just wasn’t for me.  It was a very stressful thing to be doing and I made the judgement that if I’m going to be that stressed out then I should really be contributing substantially to the world. And if I was going to make that much money I wanted to believe that I was creating that much value. I didn’t think I was doing that and so I left.

    My original intention was to leave finance completely, so I started working on a web project called Cowbird with a good friend of mine, which is a storytelling website and a different type of social network intended to make people slow down and reflect on things and tell some stories. The first story I told on Cowbird, at the end of 2011, was about why I left HFT, and somehow it got picked up by Marketplace on NPR (National Public Radio). They called me up and asked me if I would do a two minute commentary on high frequency trading, so I did that and things just went from there.  People started getting in touch with me, representatives from the Senate, the SEC and so on, and I ended up getting thrust into this role of somebody who can comment on market structure but be independent, outside of the industry.  And I like the role, I like that my expertise and experience can be useful and helpful for something.  I try to be as pragmatic and evidence-based as possible and not to be a sensationalist, but I do think that there are substantial problems in the US market structure and that there are some important fixes that are needed.

    HFTR: What would you say is the single biggest problem with the US market structure at the moment?

    DL: It was put really well at the Market Structure roundtable convened by Representative Garrett in New York recently.  Somebody said that Regulation NMS has first and foremost prioritised price, but it has also prioritised speed as the number two thing, which I think is spot on. When you analyse things, when you start to look at the academic evidence, we’re not creating any additional social utility right now.  Spreads are not getting tighter, volatility is not reducing, market depth is not increasing.  As we get faster and faster, as we cut milliseconds and microseconds, nothing is improving other than different firms are making money as they usurp others that are slower. And there are negative externalities to that process, it’s like pollution. Other firms in the industry have to make massive technology investments, systems become more complex and less stable and we have to deal with more outages and more extreme events.  So targeting that prioritisation is probably one of the most important things to do. And there are ways to do that. 

     HFTR: Such as?

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