like there might be another war of words developing on Wall
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
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.
"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
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.
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 :).