Should a trading Edge be “fair”?

new_trader

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High-frequency traders face speed limits
High-frequency traders face speed limits - FT.com

High-frequency traders are facing “speed limits” for the first time on a major trading platform, under a proposal that is being touted as a template for a regulatory clampdown on computer-driven activity.

EBS, one of the two dominant trading platforms in the foreign exchange market, is suggesting scrapping the principle of “first in, first out” trading, which it says gives an unfair advantage to the fastest computers and has led to an arms race of spending on technology.

Should everyone, big or small, have access to the same technology in order to make trading fair?

Does "unfair" mean having the [fastest,best,latest etc] technology?
 

wackypete2

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Like anything else, as long as there's big money involved trading will never be fair. The lower tier players will always be at a technology disadvantage. I don't have a problem with that...life isn't fair. What I do take issue with is that exchanges like NYSE still market equities trading on their exchange as a "fair and orderly market" when clearly it isn't by their own hand.

Peter
 
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brewski1984

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How different would the markets behave if everything was fair? Would it be possible to find an edge if everything was fair?
 

mike.

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2,099 706
I watched a program not to long ago about HF trading, the large corporations were complaining that the computers nearest to the point where the data feed entered the room were getting a fractional time advantage to prices, milliseconds, in fairness the exchange was forced to make all the data cables the same length irrelevant of where the computer was positioned in the room.
 

wackypete2

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I watched a program not to long ago about HF trading, the large corporations were complaining that the computers nearest to the point where the data feed entered the room were getting a fractional time advantage to prices, milliseconds, in fairness the exchange was forced to make all the data cables the same length irrelevant of where the computer was positioned in the room.
That would make sense if they were all paying the same price to be housed there. As soon as someone pays more they'd get a shorter cable but I don't think that is the intent though.

Peter
 
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money_13

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I think it should be fair, but, alas, it's not and I don't think this forum has the power to change it.
 

Razorsharp1

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I think the markets are already fair. The information and technology is available to everybody. Whether one can afford it or not does not alter that fact.

The markets present everybody with the same opportunity. How one takes advantage of that is down to ones means financially or any other way.

You don't see the big supermarkets thinking about the local corner shop.

As in any filed there are big players and small players, good ones and bad ones.

We are all equipped with the same mental faculty, some know how to use it to optimal effect whilst others are still in the learning process.
 

DionysusToast

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In terms of someone having an edge because they get a price a few milliseconds before everyone else - it's not quite true.

The person that gets the price first is the person that put in that bid/offer/trade.

I just don't buy that this edge is so huge. If you submit a market order to the market, I don't see how anyone sees that before it hits the market. Are we saying that between large firms and the markets they trade on that there are a bunch of computers that get the trades first? Really? I understand how they do it when there are multiple exchanges but being first in line on a single exchange and getting in front of it? I doubt it. Can they react and get an order in ahead of that? What do they do, hold the first order back whilst then sneak theirs in? They can front run to that extent?

Let them at it I say - the edge is so tiny that the costs and competition will make it a very tough game if that is the only edge they have.

Sure - they might react to information first but they are open to being gamed themselves.

For stuff like quote stuffing - that IS cheating.

Latency arbitrage on the other hand - I'm 50/50 on that one. To me - that's an issue NASDAQ and the like have to sort out - it's an inefficiency on their network. Fair game IMO as long as they aren't quote stuffing to cause the latency.
 
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In terms of someone having an edge because they get a price a few milliseconds before everyone else - it's not quite true.

The person that gets the price first is the person that put in that bid/offer/trade.

I just don't buy that this edge is so huge. If you submit a market order to the market, I don't see how anyone sees that before it hits the market. Are we saying that between large firms and the markets they trade on that there are a bunch of computers that get the trades first? Really? I understand how they do it when there are multiple exchanges but being first in line on a single exchange and getting in front of it? I doubt it. Can they react and get an order in ahead of that? What do they do, hold the first order back whilst then sneak theirs in? They can front run to that extent?
http://www.trade2win.com/boards/first-steps/145690-scalping-16.html#post1808658

Due to co-location and having a raw feed from the exchange,
they build their own NBBO, which is faster than the standard NBBO quote from
the SIP.
Its not just latency, they do see everything that is going on before
those who don't have a raw co-located feed.

http://www.trade2win.com/boards/first-steps/145690-scalping-21.html#post1810494
Its not just NYSE anymore either.

http://www.trade2win.com/boards/first-steps/145690-scalping-32.html#post1813314
The edge from HFT front running is worth billions.
Rentec and Jim Simons have done well using these methods.

For stuff like quote stuffing - that IS cheating.

Latency arbitrage on the other hand - I'm 50/50 on that one. To me - that's an issue NASDAQ and the like have to sort out - it's an inefficiency on their network. Fair game IMO as long as they aren't quote stuffing to cause the latency.
Yeah but they are well aware of that inefficiency and profit by charging
HFT firms to bypass that inefficiency with raw feeds and co-location.
 
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new_trader

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This thread wasn’t so much about whether or not the technology is giving some traders an edge. The question really is: Should technology that gives a trader a slight edge be banned by regulators just because other traders can’t afford it? I say NO! If it leads to a ‘Technology arms race’ among larger players then we will all benefit in the long run, just like space technology has benefitted the average consumer.

Here are just a few of the hundreds of devices and inventions that have been developed from knowledge gained with NASA space engineering.

•TV Satellite Dish
•Medical Imaging (Cat Scans)
•Telescopes (that look for cancer)
•Vision Screening Systems
•Ear Thermometer
•Fire Fighter Equipment and Suits
•Smoke Detectors
•Cordless Tools
•Aerodynamic Wheels
•Thermal Gloves and Boots
•Space Pens (That write upside down)
•Shock Absorbing Helmets
•Ski Boots
•Failsafe Flashlight
•Invisible Braces for Teeth
•Joystick Controllers
•Advanced Plastics
•Enriched Baby Food
•Better Cardiac Pacemakers
•Protective Paints
•Scratch-resistant Glasses

What happens if someone develops an 'algorithm deciphering system' which gives them an edge on exchanges that use a randomize pause as suggested? Will they ban that?

I don’t have any issues if the exchanges decide on their own to do something about a perceived problem, but when Government regulators get involved I only see unintended consequences and more regulation as a result. From the comments I have read on the subject, the usual responses to proposals like this come from the clueless and ill-informed public who usually and predictably respond with things like “These greedy Wall Street crooks have been robbing us so it’s about time they did something” etc...etc...As if they will suddenly become successful and rich when the proposed regulations are imposed.
 
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new_trader

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6,231 1,282
This is a good comment under the article:(y)

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slackful2 | April 30 1:42am | Permalink

Where to start? Here's the first clue: if the big banks went to the huge expense and regulatory hassle of opening a new exchange to fight HFT, do you really think that the small guy is the one being hurt by HFT? The widespread ignorance of the most basic, simple principles of competition, profit, and loss, and their role in organizing a civilized society, allows the canard of "evil HFT" to persist. HFT is a highly competitive business. That means you have to be one of the best to make any money at all. Revenues have been driven to the lowest possible point, allowing survival and a very small profit, due to this competition. The incremental value of the better prices and improved liquidity provided by HFT is mostly flowing to the retail end customer. Competition is preventing them from retaining most of it for themselves. It's like any other competitive business: profit margins are driven to the hairy edge of solvency for each firm involved, and the value of whatever it is the business is producing, be it razor blades, or liquidity, or accurate prices, is mostly delivered to the end user. The value I derive from buying a razor blade from Walmart or Target (instead of contacting the manufacturer myself, or making one, or buying one at the corner convenience store), in terms of cost and time savings, is massively larger than what Walmart makes on that razor blade. So it is with HFT. To hear, time after time, the small guys buying hook, line, and sinker the argument that HFT is stealing money from them, is profoundly sad. When EBS removes the advantages of advanced technology from the HFT folks, thus protecting the large banks from market making competition, do you think they are going to share that extra, ill-gotten, protected, non-competitive margin with the little guys? No, they are going to keep it, all of it. And what was once 90% flowing to you, will now flow 100% to the big market making banks. A free and transparent system where smaller firms can compete with the latest technology would force, and currently does force, that extra margin to flow to the little guy. This is business 101, painfully obvious. But, it's knowledge that seems to be disappearing given the comments I read.
 
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NT, I agree, and I don't care either.
It is what it is, it pays to be aware, but that certainly does not mean
opportunity for retailers is null and void.

If anything, most retailers would probably suffer if HFT was outright banned.
Reduced liquidity, and increased spreads / comms the most likely consequence.
 

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