Kilburn's Corner: Anti-HFT Parade Has Led to an Age of Technological Disruption in Market Data

Faye Kilburn looks at the impact of New York Attorney General Eric Schneiderman's anti-HFT campaign on market data technology

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Faye Kilburn, deputy editor

When New York Attorney General Eric Schneiderman first began his crusade against high frequency trading, we at Inside Market Data wondered where the buck would stop. Low latency feeds, colocation, microwave networks...arguably all of these could count as "technological advantages" that give traders early access to data. Would they all be banned to ensure a fairer market?

In September last year, speaking at the Bloomberg Markets 50 Conference, Schneiderman said that when "blinding" speed is coupled with early access to data, it gives traders the power to manipulate market movements in their own favor. "They suck the value out of market-moving information before it even goes public. That's Insider Trading 2.0, and it should be a huge concern to anyone who cares about the markets and the free flow of capital on which our economy depends."

Initially, Schneiderman's scare tactics seemed to be working. In October 2014, the University of Michigan ‘voluntarily' ended its early release of consumer sentiment data to Thomson Reuters, which the vendor had once-upon-a-time paid a premium for, and company press release providers Business Wire and Marketwired agreed to stop selling direct feeds to HFTs.

In the last few weeks however, reports have emerged that Schneiderman is not happy with the level of cooperation he is receiving from Barclays, after announcing that he was suing the bank for fraud relating to its high frequency trading practices last June. Based on internal communication, Schneiderman says that Barclays claimed dark pool trading allowed it to protect clients from predatory traders by using speed to get better prices for customers, or as Schneiderman sees it, the bank used its knowledge of prices in slower feeds to maximize its profits. The two will come to blows on Feb.11 at a hearing in the New York State Supreme Court in Manhattan when Schneiderman will find out if he can go ahead with his lawsuit.

But whether Schneiderman is given the green light by the Supreme Court or not, his efforts are having an impact on the industry at large. In the past two weeks, Inside Market Data has spoken to two new exchanges whose raison d'être is to discourage predatory high frequency trading, though neither will comes out as explicitly anti-HFT.

Earlier this month, I interviewed officials at New Jersey-based alternative trading system IEX (made famous by Michael Lewis' book The Flash Boys) who have designed an anti-co-location architecture comprising roughly 38 miles of coiled fiber to introduce an artificial delay of 350 microseconds for all participants receiving market data. And this week, Canadian stock market Aequitas NEO Exchange told me about their "speed bump" of between 3 milliseconds and 9 milliseconds applied to any HFTs taking liquidity.

According to Joacim Wiklander, chief trading and data officer at Aequitas NEO, exchanges have been catering unfairly to HFTs for years via special data feeds and colocation offerings. "Using a combination of technology and market structure solutions, we are trying to give natural investors a bit of an edge back because it has been a technological arms race up till now," he says.

In fact, Aequitas NEO isn't stopping there. In the next few months, the exchange plans to launch a number of "disruptive" initiatives to shake-up the market data landscape in Canada, including lower fees and the creation of a Canadian consolidated tape. Currently trading participants in Canada have to have costly direct relationships which each exchange in order to calculate a national best bid and offer and are held captive by the fees charged for data to comply with regulatory obligations such as best execution.

It may be doing Schneiderman too much credit to say that he alone is the genesis of this step-change. After all, HFT has long-been in the crosshairs of the regulators despite there being a significant portion of the industry who is unconvinced that its effect on the market is negative. But whether you are pro- Schneiderman or not, there is no denying that his tenure is coinciding with a time of major technological disruption in the market data sector.

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