More than any other high frequency topic (HFT) topic, this one irritates the anti-HFT crowd the most.
The market is a gathering place – be it physical or digital – where buyers and sellers of thousands of financial products meet to do business. It is argued everyone should have access to all information and data at the exact same time – the integrity of the market depends on it. Companies should disclose information in a known and predictable manner and prices of financial products should be released to everyone at the same time.
No one should have access to anything prior to anyone else.
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[This is part two of a three-part series about high frequency trading. In part one, the use of computers to quickly identify and execute trades was discussed. Here, in part two, access to data is dissected.
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IT’S LIKE SPORTS
Early access is akin to one of us watching a sporting event in real time while the other watches on an eight-second delay. For sports, it doesn’t matter, unless we’re next door neighbors and you’re annoyed with me cheering before a play takes place on your TV. We watch for the sheer joy of it.
But the stock market is serious business. For some of us, it’s our livelihood and the playing field should be level. We should all have access to the same info and data at the same time. At least this is what the purists argue.
GETTING DATA EARLY
It’s true. HFT firms pay big money to set up servers at the exchanges to get access to information and data before the rest of us.
But let’s clear something up that should be obvious but no one seems to be picking up on. Unless a time machine has been invented that I’m not aware of, nobody gets data or information early –that’s categorically impossible. It’s just that me, you and everyone who complains gets it slightly late.
It’s not that the dissemination of information and data is purposely delayed to the rest of us; it’s that physically being at the exchange with a fiber optic connection enables access a fraction of second before it appears on computer screens all over the world.
The exchanges are not discriminating against us. They aren’t giving us the data late. As soon as a transaction occurs, it is immediately – as fast as technology will allow – released to the public. Literally within a split second, the details of the transaction are known all over the world. The HFT firms are simply paying fee – albeit a huge fee – to physically be in a place where the data is delayed less than elsewhere. I don’t think it’s a shock that information generated in New York might be seen by those physically in NY a fraction of second prior to those in California or London.
The practice of paying money to have this advantage is as old as the market.
LOOK BACK AT MARKET HISTORY
How was data disseminated in the 1920’s? Those who had the means could buy a seat on the floor of the exchange and have access to data virtually in real time while everyone else had to wait until the paper was printed the next morning.
Move forward to radio and TV. One could still buy a seat on the floor or wait for the evening news.
Continuing into the 1970’s, one could buy and install a quote board in his office to get access to the most up-to-date prices. It wasn’t as good as being on the exchange floor, but it was better than waiting for the evening news.
Then came the 1990’s and the Internet. Online trading was born, and anyone with Internet access could see prices within seconds of when the transactions took place. Dial-up service resulted in a several seconds delay. Broadband was perhaps delayed a split second. And regardless of what connection you had, there were good and reliable data providers and bad and sketchy data providers. If you were a trader, paying a monthly fee for a reliable data feed was a no-brainer. It paid for itself many times. If you weren’t willing to pay, that’s ok too because the free quotes you got from the internet were still very good and barely delayed.
Let’s not forget Bloomberg. For $1700 you can get a Bloomberg terminal on your desk. Most traders who use it say they couldn’t survive without it.
Whether it’s paying for a seat on the exchange or paying for a ticker device or paying for a Bloomberg terminal or paying for any other data feed, the concept of paying for a good, reliable and nearly-real time data and information has existed for as long as the markets have existed. To say a HFT firm should not be permitted to set up camp at the exchange to see data a fraction of second before it is known to the world would put an end to a practice that has always existed. Seriously! The lay public used to not get information until the morning paper was printed many hours after the exchange closed.
Today the lay public gets information a millisecond delayed. What’s the problem?
And besides, thousands of transactions take place every second the markets are open. The concept of everyone having access to all data at exactly the same time sounds good in theory but is ridiculously unrealistic in the real world. If the worst case scenario is everyone on the planet gets data within fractions of a second of each other, I think that’s pretty darn good.
WHO DOES IT AFFECT?
Having access to data and information prior to the lay public has always existed, and you’re kidding yourself if you think milliseconds are the difference between making and losing money. So let’s gauge this issue based on who’s affected rather than the practice itself. If many people are negatively affected, perhaps it should be prohibited.
But if few are affected, the loud minority may want to quiet down.
Slightly-delayed data doesn’t affect long term investors – those who buy XYZ with the intention of holding long term and benefitting from price appreciation and dividends. If it takes weeks just to decide to buy a stock, one cannot argue they’re getting screwed by data being slightly delayed.
After all, there’s a reason Warren Buffett got rid of his ticker in the 1970’s. I promise you Buffett doesn’t sit in front of his computer watching real time quotes flash across his screen.
Slightly-delayed data doesn’t affect swing traders – those who buy XYZ at around $50 and sell three weeks later at $55. It doesn’t matter if you see the “real time” quote at 10:00:00 or 10:00:01, and it doesn’t matter if you buy at $50.07 or $50.09. If you honestly think the difference between making money and losing money is two cents on the entry, find another line of work. Money is made managing positions, not brilliantly entering at a precise time and price.
DAY TRADERS ARE IMPACTED
Slightly-delayed data does affect day traders – those who buy and sell many times/day and go home flat every night. But nobody gives a crap about day traders. If you are one, you are on your own. You will get no sympathy from anyone in Washington. If you choose to step up to the table and play this game, you accept the risks and conditions and everything else that comes along with it.
The only players negatively affected by HFT firms getting a glimpse of the data a fraction of a second prior to everyone else are day traders, and sorry to reiterate this, no one should care about them.
THE ONLY ARGUMENT
The only case against permitting HFT firms setting up shop at the exchanges is one of ethics, one that says even though transactions are known all over the world virtually in real time and that only lowly day traders are affected, nobody should get a glimpse of the data by a means that is controlled by the exchanges themselves. But I don’t buy this, and I believe it’s a sorry excuse used by losing traders to pass the blame for their poor trades. HFT is not the reason traders lose. All HFT does is distract traders from identifying the real reasons they aren’t doing as well as they should.
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