A high-speed trader published a brutal takedown of a new plan to slow down trading — and it's the start of Wall Street's next battle

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thenews
28496
thenews  

It looks like there might be another war of words developing on Wall Street.

The Chicago Stock Exchange in August outlined plans to adopt what it calls a Liquidity Taking Access Delay, a 350-microsecond delay for those who trade against resting orders on the exchange. The Chicago Stock Exchange said in the filing that the LTAD was designed to neutralize high-speed traders engaged in latency arbitrage.

Latency arbitrage is where traders take advantage of price disparities between the same or related securities on different markets. What the Chicago Stock Exchange is trying to do is put an end to this practice.

Now, a high-speed trader has hit back at the Chicago plan. Hudson River Trading, a huge high-frequency trading firm that is responsible for around 5% of all US stock trading, filed a letter to the Securities and Exchange Commission on October 6, and it's a pretty brutal takedown of the proposal.

It reads (emphasis added):

"CHX justifies the proposal by stating '[T]he Exchange submits that the proposed rules for LTAD are designed to operate in a manner that is consistent with the Act in that they are designed to protect investors and the public interest, are not designed to permit unfair discrimination, and would not impose any unnecessary or inappropriate burden on competition.' Contrary to this rote recitation, the proposed rules are not designed to protect investors and the public interest; aim to permit unfair discrimination; and would impose an unnecessary and inappropriate burden on competition."

The Chicago Stock Exchange said its move was in response to a change in the trading of the SPDR S&P 500 trust exchange-traded fund. The exchange said it first noticed latency-arbitrage activity in the SPDR in January and as a result of this market makers had "dramatically" reduced displayed liquidity. The August filing said:

"The Exchange believes that the best way to minimize the effectiveness of latency arbitrage strategies on CHX with respect to resting limit orders is to implement an asymmetric delay, such as LTAD, to de-emphasize speed as a key to trading success."

Suffice to say, Hudson River does not agree. It argued that the latency arbitrage it is describing is simply a case of some firms being better at what they do, and that CHX doesn't seem to like that because it's preferred market participants are on the wrong side of this battle.

It said:

"Conveniently, when CHX's preferred market participants engage in the activity of updating prices of SPY due to changes in the price of S&P 500 futures using sophisticated pricing algorithms, it is generally beneficial, whereas when another market participant does the same thing, it 'diminishes displayed liquidity and impairs price discovery.'"

And (emphasis added):

"CHX has, without understanding why one firm appears inferior to the other(s), decided that the other firms must be engaging in "latency arbitrage." The idea that two firms doing the same thing exhibit varying levels of skill or speed is not surprising - it is a general property of the natural world. Because CHX's preferred member is not the firm that appears to be better at this trade, it seeks to modify its rules in order to tilt the playing field in its preferred member's direction."

Hudson River went on to say that, in basic terms, some firms are better, faster, and more skillful, and that the Chicago Stock Exchange needs to accept that. It said (emphasis added):

As a liquidity provider, HRT understands that other firms may be faster than it is, may have better information than it does, and may simply be better at pricing securities than it is, and it must factor that into the displayed prices at which it is willing to buy and sell. This is not a new concept as there have been speed, information and skill advantages since markets have existed.
CHX is proposing to implement a feature that allows it to pick winners and losers. It has no reasonable justification for why it is attempting to discriminate among its market participants, and CHX's commercial interests should not allow it to unfairly discriminate among its members or to put an undue burden on competition among competing exchanges or among its members.

Now, if all this sounds familiar, it is because it is.


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Chike Assuzu
289
Chike Assuzu  
I am not into latency arbitrage but why should they tamper with the speed of market data just because one firm is better than the other. Doesn't sound right. Their proposal will based on taking sides, then it no more trading 
Lazar Radimir
122
Lazar Radimir  
350-microseconds are not that significant delay, so I don’t think that will affect all. On the other hand side, the speed is All for the Arbitrage trades, so they may feel it.
However, I do not found the latency arbitrage trading right. It is benefiting from a Broker weakness, not real trading and following the trend.
François*Thierry
135
François*Thierry  

Greetings,

I do not have any problems with arbitrage trading or how the money comes in the end :) 
Now serious - even latency arbitrage trades or post news trades (spike trades) availability appears with any broker or exchange or liquidity pool etc., soon or later they tried to cut this profitable way of "trading" by closing accounts, cutting the FIX-API connectivity's and etc., so if any chance appears - just use it - will not last too long :). 

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