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August 1, 2010

Cover Story: Not So Fast!

By John D'antona Jr. and Peter Chapman

Thank you for reaching out.
Co-location is one tool being used almost entirely by a very small subset of market participants. The amped speeds used by HFT's are not important to over 99% of long term investors, as well as most traders in addition. So explain then why the cost bar should be raised and born by all investors? The exchanges will always retort that co-location is available to all, and so it is fair. Of course it is available to all, as is a $1,700,000 Bugatti Veyron, which does 0-60 in 2.6 seconds. But should that class of car be the VIG to play? If I only need a Civic, or more realistically the V6 Camaro, should I be forced to buy the Bugatti to drive on the freeway? Ask NYSE to see their fee schedule; a good  laugh always helps  move along a slow summer day.
These light speeds are not speeds needed by investors: long, intermediate, or short term. Speeds measured  in millionths of a second and smaller are critical  only  to those firms that are trying to beat slower orders to a quote (by predatory high frequency traders) and, in the case of "liquidity providers" pulling a bid before the sell order in the pipe hits it. Is bid pulling (I'm sorry... "risk management") something we all should encourage?  Is a bid really a bid if it is good for a microsecond? Is that liquidity provision? Or is it fleeting, and an illusion that would make Copperfield envious? It was fleeting on May 6th for sure. Speaking of May 6th, I still am shocked that I hear senior industry folks talk about the market order as being a flaw in our market structure. I think it should be mentioned that the market order has been a useful and fair order  type for a century, and despite volumes today  being three times what  they were just a few years ago, this market order is given as the chink in  our market's armor. This is laughable. It shows truly that there is a huge difference between volume and liquidity, and we collectively need to decide which one we value, and which one the exchanges value . Exchanges want to maximize volumes, be they synonymous with liquidity or not.
By the way, we recently wrote a white paper dealing with unfair attributes in data feeds being utilized on the street. BATS has been a US-based exchange which has addressed the issue, and is making chages. They are to be commended; I am not sure  that the other exchanges have followed along.
There is a role and a place for all types of trading in our markets, including HFT, but it is our position that fairness and  cheap equal accessibility for all is crucial for confidence in our markets, and the capital raising  role  of our markets, which we must not lose sight of. 
Sal Arnuk
Themis Trading LLC


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