Chimneys Are The Newest Weapon In The HFT Arms Race
The above is not a headline from The Onion. And it is not one of Themis Trading 2012 market structure predictions. It is an actual headline from Securities Technology Monitor. Here is more from the article:
“The operator of the Nasdaq Stock Market said it would immediately make available to its customers a chimney system that would increase by 70 percent the amount of computing power that can be installed in a rack of computing appliances…The chimneys that Nasdaq will place on customers racks of computing power will draw off heat exhaust and as a result allow more computing power be placed in a conventional rack of 44 servers.”
Chimneys. NASDAQ is now building chimneys for their HFT clients. The HFT arms race has now gone to a new level. Apparently, the exchanges will stop at nothing to please their highest volume clients. They are even more desperate for market data revenue now that their transaction revenue has been dropping as volumes have plummeted. According to Reuters, “Higher demand for its proprietary data services helped drive (Nasdaq’s) market data revenue up 10 percent, while market technology revenue rose 4 percent from a year earlier due to recently delivered projects.” These high revenue generating clients are demanding more processing power to make sure they are seeing information before other HFT’s . And like any good arms merchant, the exchanges are more than happy to supply them with the weapons to beat their competitors.
In a 2009 blog post, Rick Bookstaber, former hedge fund risk manager and now a Senior Policy Adviser at the SEC, compared the technology spending in the high frequency trading industry to that of an arms race. He said, “High frequency trading is embroiled in an arms race. And arms races are negative sum games. The arms in this case are not tanks and jets, but computer chips and throughput. But like any arms race, the result is a cycle of spending which leaves everyone in the same relative position, only poorer. Put another way, like any arms race, what is happening with high frequency trading is a net drain on social welfare.”
Rick Bookstaber is right and building chimneys at a colocation facility is a net drain on social welfare.