Last week we published a piece on HFT's social relevance. It stated that for HFT firms to get accepted as a regular part of financial society, they have to make more efforts in explaining their social relevance. There is more necessary though than relevance. What the HFT and trading community would need to consider is what is called 'the social licence to operate' or SLO. It defines what is necessary to operate a business that can be deemed controversial.
A couple of days ago I was having beers with a friend. He just watched a rerun of the Dutch documentary on HFT trading (here in English for non Dutch IP's and here in Dutch) and was outraged over the practices and the financial industry in general. It's understandable, it's a high profile, well paying industry linked to a sinking global economy. Also, people outside of the market have a very hard time understanding what HFT's relevance is. My guess is, they probably never will. How could they? Even within the industry, opinions are mixed and discussions frequently turn into insult sessions, especially on Twitter. If even we can’t agree to disagree, what can we expect from outsiders? All this creates a very low 'social licence to operate'. Policy makers and politicians pander to these signals and put the business under scrutiny with tight regulation and oversight. The question is, how can the industry get (or regain) that social licence? To me, the answer lied in the beer can my friend was holding and the fact that he also mentioned how he actually made some money buying shares in, the now, infamous van der Moolen trading firm.
That Heineken can he was holding, the family producing the beer is worth billions. The product itself though can be considered socially controversial (ask the Muslim community or someone in the AA). So why is there no huge public outrage over the money the Heinekens made? How does a beer company get an SLO? It’s because there is social acceptance and inclusion, two important parts of an SLO.
Let’s start with the first: social acceptance. You get socially accepted when you act transparent and socially responsible (corporate governance). Mix this with some proper PR and marketing and you can get socially accepted. Now, transparency is not HFT’s biggest forte. They are increasingly visible but there is a lot left to be desired. And how socially responsible are they? I happen to know that a lot of the successful business leaders are actually extremely socially responsible, donating time and money to different charities and interests. They also promote those values internally. However, they are very private about this. This creates a mismatch between their public appearance and their actual actions. To me this is a missed opportunity to elevate the entire industry image while doing a good thing at the same time. Noted exception, IMC is very commendable and somewhat public in what they do with charity. But why not do something together as an industry? The Dutch hedge fund business set a good example. Professionals from the industry came together to form a charity organization called A4C. They do more than just collecting and donating money, they invest their personal time into it as well while simultaneously creating a good networking opportunity.
Also, when you look at different websites of trading firms, you don’t see a lot of other corporate responsibility that other industries have embraced. What is their take on climate change or preservation for instance? HFT consumes massive amounts of energy. How much of this is green or what do they do to offset emissions used to generate that amount of electricity? There is a lot more we can do to be socially responsible and accountable, more than is done already.
And then there is inclusion, or the opportunity for the public to join in on the party. My friend had shares in van der Moolen, run by people who made and lost millions. It was publicly traded, so it was, more or less transparent what was going on and, everyone had the opportunity to profit. For that reason I’m very happy that Flow and Virtu decided to go public. It’s never easy for firms like these to be publicly traded, but it’s the way forward. It will take HFT and prop trading to a more transparent environment and they will have to become more outspoken on their corporate governance and social responsibility. Hopefully they will continue to churn out profits and have their stocks roar. The invested individual will love them for it as much as they love their beers. I call upon Optiver and IMC to do the same, I’m sure the investors would love to pick up those stocks as well.