Monday, May 15, 2017

Latency Disparity Contributes to Arbitrage


Reg NMS and the current fragmented market are obvious contributing factors to latency issues, although there a couple of additional reasons that stand out as to why not all firms receive the same information at the same time.  One contributing factor to this latency disparity is of course the speed of the Securities Information Processor (SIP), and another is the fact that firms co-locate their equipment to the servers of the exchanges.  This advantage of speed combined with a predatory computer algorithm for trading, gives a very unfair advantage of access to see the public NBBO data before trading firms with a slower connection.  
SIP
The SIP is tasked with centralizing all stock market data, then disbursing that data at the same time to all market subscribers.  the SIP has put much focus on improving its latency, although direct data feeds are historically faster than the consolidated feeds.    Some are of the mindset that reducing the SIP latency will create a more fair and efficient market, the issue of latency arbitrage is much more complicated than just reducing the latency of the SIP.  
The SIP latency refers to the time that it takes to receive all stock information, compile it together, aggregate and assemble all data, and then dispense it out.  The latency problem with the  SIP is not the time that it takes to perform these functions, even if that time is improved, it is with the method of disbursing all data.  The transportation of that data is where the challenges lie.  
There will always be a latency issue involved with consolidated data compared to direct data feeds, because there are various sources for the SIP information.  For example, the NYSE houses their data center in Mahwah, NJ, while Nasdaq’s server center is in Cartaret, NJ.  Just a slight different geographic location can make enough of a speed difference that a latency issue is created.
Flash Trading by Co-Location
Flash Trading refers to the practice of exchanges ‘flashing’ buy and sell order information to select premium subscribers, typically these are HFT firms, a fraction of a second prior to when they are publicly available.  This is very controversial as HFT firms use this advantageous information to trade ahead of pending orders, which is also known as front-running.
This predatory practice has been going on for quite a long time, as in 2009 Senator Charles Schumer requested that the SEC ban flash trading altogether, stating that it contributes to a two-tiered market, the privileged few and everyone else.  
Other factors such as computer algorithms, technology, regulations, and distance contribute to latency issues, however, these two main factors of consolidated feed vs. direct feed and flash trading, both lay the groundwork for the current two-tiered market structure.  
Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.

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