What HFT Firms Must Do After Flash Boys Fiction

In this Traders Q&A, NanoSpeed CTO Sanjay Shah defends the markets against charges they are rigged and warns that the industry needs to brace for new rules.

Traders: It seems that the initial outrage over Michael Lewis Flash Boys has died down. What do you think will be the next story? Will we see new regulations or hearings with politicians? Will there be changes to the market structure?

Sanjay Shah:I think there will be some changes because of the fact that HFT has been in the public eye of late and I just hope that the regulations will be the right regulations. I also hope that they will be introduced for the right reasons, not based on Flash Boys [which] is partly a work of fiction, and will hopefully be seen as such.

Traders: What parts of the book do you think are fiction?

Shah: If you say that all the American markets are rigged then I think thats wrong. We have been looking [at the markets] for quite some time and they are definitely not rigged.

Traders: But to play devils advocate, some of the exchanges have been selling their news data at a slice of a second before to their primary customers, so there is an exclusivity there. And according the book, the head of IEX noticed that the instant that he hit a purchase order, the prices shot up in a split second. That doesnt seem like a level playing field, does it?

Shah: Yes, if they are giving it to some of their participants a few hundred milliseconds before anyone else, thats definitely wrong. I think the case with these exchanges is normally that you do have a tiered sort of paying structure for the market data, and some of them are in slightly faster lanes than others. So then you need [to make sure that] the starting point is the same, then by the time it actually gets to the market participants it can be earlier with some than others depending on which lane you are in.

This has been the same sort of playing field for the last 100 years. For example, in the trading pits back in the days the traders who were closest to the market makers were the ones who inevitably got the better deals. This is just similar to that really.

Traders: It seems that the industry knows that some kind of regulations are going to happen for HFT and even to dark pools, but theyre hoping its nothing like Sarbanes-Oxley. Are your clients bracing for a bad law? Are they participating with the government to help create a better, smarter law?

Shah: So, can I just take your first point about the dark pools? I think you have just spotted the elephant in the room. I think a lot of the people who benefit the most from HFTs and narrow spreads are retail investors, but some of the big trades are going on in the dark pools. Some of the regulations on that do need to be looked at. I dont think that dark pools are necessarily evil, but I think that some of the regulations around them and transparency need to be improved.

And as far as companies like NanoSpeed actually helping the regulators, yes, we are and we will contionue to do so.

Traders: Are firms going to chase even greater speeds or is there going to be a sober rethinking of high frequency trading?

Shah: What we have is that the speed wars are becoming less and less important now. Its more about using the technology to process 10 times or maybe 100 times more data in real time and to make the right trading decisions. Its basically about smarter trading rather than faster trading. I think that well be seeing that more and more as the year goes on.