Scream if you want to go slower

Colm FurlongIf you read the blogs, the tweets and the industry press, and attend the conferences, you could be forgiven for believing that all traders of financial instruments are completely consumed by the crazy race to zero. Some commentators say the game will run and run in an ever decreasing battle for nanoseconds. Others say that to simply chase and trade latency is not a viable or scalable business model.  Let’s be completely clear, low latency is very important in electronic trading and has been ever since the business of electronic trading began. Today’s markets won’t tolerate technology that is just OK – it must be fast.

Part of this speed obsession is business driven, where new opportunities arise as technology improves. Part of it is marketing hype and part of it is down to human endeavour to be the best. It also has a lot to do with the natural progress of technology innovation.

Of course the big issue in the financial markets is not the speed of technology itself but its potential misuse. It’s more about the people who use it, what they use it for and whether or not these behaviours hinder the running of a free and fair marketplace. It has been said before, but I’ll say it again, regulators need to stop looking at curbing the technology itself and focus on the behaviour of market participants. Before the regulatory brakes are applied, they need to make sure they don’t bring the markets to a screeching halt. The application of great technology that allows fast participation in our markets is also a force for good.

Hands up who wants to buy or sell a stock in the market at the wrong price because the market information is lagging, or the spreads are artificially wider than the price points where buyers and sellers are actually willing to trade.

Comments
One Response to “Scream if you want to go slower”
  1. Christian Voigt says:

    I agree with your blog. Yes agreed, the speed advantage is the key feature for most HFT strategies. But I feel there are more general points we should think about.

    There is a recent research paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2034858) that looks at HFTs very differently.

    Firstly, it compares High-Frequency-Trader vs. Low-Frequency-Trader. If you try to generalise the experiences from HFTs, then you can argue that the driving factor is the difference in processing latency (i.e. receiving a signal, processing the information and sending out a response) between HFTs and LFTs. Thus, what we need to care about is the difference in speed between HFTs and LFTs. The absolute speed of HFTs is secondary. After all, HFTs care only about being first.

    Secondly, the paper discusses the concept of clock time vs. volume/event time. Clock time measures event in time, as we know it. This can become quiet imprecise, since a lot of things can happen at an exchange within a second. In contrast, event time sorts all order book activities in sequence of their occurrence. Or volume time just looks at changes after a certain amount of volume being traded. If you look at markets in event time or volume time, things become much more calmer and better to understand.

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