Opening Cross: US Bans ‘Unfair’ HFT, Low Latency (April Fool! But Don’t Be Fooled About HFT)


US lawmakers have announced new legislation outlawing high-frequency trading—defined as any trade that holds a position for less than one second—and new initiatives to crack down on low-latency distribution of market data, defined as any data packet reaching an end-user within 500 milliseconds of price formation at the trading venue, forcing trading firms and data vendors to implement SEC-compliant “speed bumps” that ensure consistent latency with their peers, using regulated GPS clocks.

April Fool! Anyone who’s fallen for an April Fool gag before will value a sense of humor and a thick skin. Especially when you learn that a press release issued by technology vendor Options last Tuesday about creating a datacenter in Iceland to serve transatlantic arbitrage flow was actually an April Fool’s Day joke.

Many years ago, when the publication date of an issue of Trading Technology Week (now Sell-Side Technology) fell on April 1, two former colleagues and I floated the idea of including joke stories in that issue among our regular coverage. The idea was vetoed, but not before drafting stories—ranging from a new exchange platform being rolled out for use by Transylvanian blood banks to straight-through processing of snacks to keep traders at their desks through their lunch hour—that aped themes we wrote about every day, yet were so ridiculous that no one would confuse them with fact.

However, the press release issued by Options—while lacking detail and not necessarily practical (the date of completion of 2018 gave us pause for thought as to whether the market would have already overtaken this need, but not sufficient pause to dismiss the story out of hand)—is hardly far-fetched. Indeed, in 2010 then-MIT academics Alex Wissner-Gross and Cameron Freer authored a paper titled Relativistic Statistical Arbitrage, which proposed trading venues at locations equidistant between major trading venues, while last week The Guardian highlighted GreenQloud, an Iceland-based cloud computing provider that uses hydropower and geothermal energy, just as Options claimed its fictional datacenter would. After all, had the company said its datacenter would be powered by penguin-treadmills and heated by whale flatulence, we might have suspected something fishy. On the contrary, the announcement—since removed from the company’s website and Twitter feed—carried the weight of authenticity.

Also carrying such weight are the many voices decrying high-frequency trading following the publication of Michael Lewis’ new book, Flash Boys. Perhaps that isn’t surprising since in the past few years I’ve heard everything from an experienced investment professional insisting that HFT is synonymous with front-running to a senior exchange executive openly admitting to not knowing what HFT is.

I’m neutral on HFT, but I’m far more concerned about the dangers of legislating progress. People have always speculated on short-term market movements; now they can merely do it even shorter-term than ever before. That doesn’t mean the markets are rigged, just as co-locating in an exchange’s datacenter doesn’t mean you’re front-running ordinary investors. And as an ordinary investor, am I concerned that a prop trading firm’s algorithm can subscribe to a low-latency datafeed and receive data faster than I can through my internet brokerage? No, because ordinary investors aren’t pursuing the same strategies as those firms. Plus, I don’t have millions of dollars to throw around sub-second and to invest in the infrastructure to support my HFT activities. And this is a key point: that banks can invest millions in tools and infrastructure to be faster than me isn’t an unfair advantage; it’s only an unfair advantage if—assuming I have just as much to spend—the same advantages are withheld from me, such as through secret early disclosure of market-moving information to those paying a premium.

Ultimately, if we succumb to knee-jerk reactions that hamper technical advances, then we’re all the April Fools.

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