August 1, 2010

So Not Fast!

By By John D'antona Jr. and Peter Chapman

The SEC and others have broached the idea that the markets might be best served if traders maintaining quotes for some minimum time period. The idea does not sit well with Steve Schuler, chief executive of Getco, a high-frequency market-making firm. "It's a slippery slope if you regulate how long someone has to hold their quotes," he told Walter. "It would be a big mistake to slow everything down to the lowest common denominator. We would not have the most competitive markets in the world if we did."

The parallel argument against hyper-fast trading is that it is unfair for some market participants to be faster than others. Those traders who believe they've been put at an unfair disadvantage cite two bones of contention: direct data feeds and co-location.

For traders looking to trade faster than others, it is typically necessary to take data direct from exchanges rather than purchase quote and trade information from a consolidator such as Bloomberg or Thomson/Reuters. The direct feeds populate algorithmic trading engines faster, allowing traders to react faster than those without such feeds. The drawback is that the direct feeds are more expensive.

Some in the industry want the SEC to outlaw direct feeds and require all players to get their market data from the same source. The Investment Company Institute, which represents mutual fund companies, told the SEC in a letter that "the Commission should consider eliminating the two-tiered distribution of consolidated quote and tape information." The ICI believes all traders should get their data from the same source.

Southeastern Asset Management, an advisor to Longleaf Partners mutual funds, feels the same way. Head trader Deborah Craddock and others executives told the SEC that "fairness would dictate that public price information be released to all market participants simultaneously."

Co-Location

Bank of America Merrill Lynch, on the other hand, contends that the problem is with the parties that own and operate the consolidated tape feed from which the market data vendors get their raw data. BAML believes a lack of investment by the members has caused the tape to lag behind other data products. BAML argues the SEC should "encourage, if not require" an upgrading of the tape.

So instead of focusing on the effects of speed, attention has shifted to co-location. Sources have pointed out that the market's fastest traders are often co-located and have a distinct time and place advantage. This advantage allows them to beat slower traders to the fill and to get crucial market data. High-speed trading, augmented by co-location, can prove formidable for slower participants.

Tabb Group reports that while nearly one-third of the buyside is in favor of such a ban, the sellside and execution venues are emphatically opposed to such a move.

Co-location involves a trading firm placing its computers and servers within the same facility as the exchange's matching engine. The thinking goes that the closer a firm is to the matching engine, the faster it gets market data-and therefore it can react and trade faster than the competition. Getting the fill on a trade first, after all, is the name of the game.