Electronic Trading Executives Want to Shoot the Messenger

NEW YORK ( TheStreet) -- The Wall Street Journal, USA Today and other media are a big reason investors have lost confidence in the stock market, according to a panel of electronic trading executives speaking at an industry conference hosted by Sandler O'Neill Thursday in New York.

"What we're most aligned on is we want to turn the average person into the average investor. We all benefit when that happens," said Bill O'Brien, CEO of Direct Edge, a stock exchange whose owners include Goldman Sachs ( GS), JPMorgan Chase ( JPM) and Knight Capital Group ( KCG).

What's keeping them away, according to O'Brien, is "headline risk. It's the flash crash and the other events we've been through in the past year." O'Brien added, however that, "it's not just retail, it's actually the professionals too," who have lost confidence in trade execution and the smooth functioning of markets.

In addition to the May 6, 2010 "Flash Crash," when the Dow Jones Industrial Average fell 1,000 points, or 9%, and recovered within minutes, the executives referred to the botched IPO of Facebook ( FB) on May 18, 2012, which was marred by trading glitches. Nasdaq Omx Group ( NDAQ) was fined $10 million last month by the Securities and Exchange Commission over its failures tied to the IPO. They also alluded to a computer error at Knight which cost the company $460 million last year and drove it into the arms of competitor GETCO.

Another infamous trading glitch came when exchange operator BATS was forced to pull its own initial public offering. BATS founder Dave Cummings wrote in an email at the time that "some in the media love to overhype the occasional glitches," because "they envy people who make money."

As a participant in Thursday's panel discussion, Cummings may have been the most impassioned in blaming the media for his industry's problems.

"We're facing a no-win struggle that, you know, train wrecks sell newspapers and so that's what the media wants to cover. It's more interesting to say the sky is falling, the market's rigged, there's huge problems. No matter all the good news you pump out that says 'OK, the market worked again today, we didn't have any problems,' it doesn't get printed. And even when they have nothing to run they regurgitate a list of all the problems you had the past five years because it's more interesting to read than 'Hey everything's fine we don't have problems.' And so I think it's just a media perception, but what do investors want? The market's more than doubled in the last five years. They can trade for less than 10 bucks. At the click of a button get a fill in less than a second with a penny spread in most, you know, high cap stocks. It doesn't get any better than that," Cummings said.

Chris Concannon, president and COO of electronic trading firm Virtu Financial also chimed in, stating "there's a couple of reporters at the Journal that I might want to talk to about helping us with our confidence in our markets."

O'Brien added, "Amen. Stop scaring people."

It's easy to see why these executives are so upset. High-frequency trading profits have taken a drastic tumble -- from $5 billion in 2009 to $1 billion last year according to Rosenblatt Securities data cited in a recent Bloomberg Businessweek article entitled "How the Robots Lost: High-Frequency Trading's Rise and Fall." While the article certainly notes the technical glitches scaring off investors, it also points to shrinking margins for high-tech trading firms -- an inevitable occurrence as nearly any industry matures.

Despite repeatedly returning to the subject of negative media coverage of their industry, the electronic trading executives appeared willing to take at least some share of the blame.

Concannon, for example, faulted industry participants "accusing other participants of manipulation." It is "kind of a problem if you want investor confidence when we as an industry are negative about ourselves," he said.

The executives also noted the importance of preventing future trading mishaps.

O'Brien declared "we're about 98% of the way there with respect to the Flash Crash risks. The limit up/limit down system that's been implemented almost completely and will be by August will really solve that problem and the idea of a stock going from $40 to a penny to $39 in a couple of minutes just won't be able to happen."

Let's hope he's wrong. As a member of the media who envies people who make money, I've been chomping at the bit for my next chance to overhype an occasional glitch.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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