Nice rally yesterday even though it was built on light volume and not much news flow. It had all the typical signs of rallies earlier in the year – ramp up of futures in pre-opening, gap up opening, tight range in the middle of day on very light volume and then the afternoon surge. While we heard plenty of pundits claiming the worst was over and sending the all clear signal, we didn’t hear any of the pundits complaining that high frequency trading was the cause of the ramp. While they were quick to blame HFT for the selloff, they seemed to overlook that HFT probably helped the rally. As we have said in previous posts, HFT amplifies moves. HFT does not aid in price discovery, it distorts price discovery. HFT does not analyze fundamentals, it analyzes data patterns and then makes sure it gets the winning trade first.

Rather than blaming HFT for the selloffs, we think the pundits should change their focus. They need to start blaming the fragmented market structure and the arms merchants who arm the HFT with the weapons that allow them to sniff out and amplify the real orders. It seems like almost every week, we find a new way that the exchanges try to tilt the balance of power in favor of their largest clients, the HFT’s. Here is just the latest example of what they are doing: The New NYSE ARCA Integrated Feed Product. Now that is certainly a catchy name but what is it? According to NYSE (Read more here):

“The NYSE Arca Integrated Feed will deliver all messages as they occur on the matching engine. Messages will be categorized as depth of book updates, last sale, imbalances, PBBO (Protected Best Bid Offer), and security status.”

“Offering all of these messages via one feed while maintaining the lowest possible latency, the NYSE Arca Integrated Feed will meet traders’ demands for a low-latency integrated feed that will provide clear transparency on our markets. To benefit from the new feed, customers are required to establish connectivity that is sufficient to support a substantial increase in data content and bandwidth.”

Ok, sounds initially just like another data product offered by the exchanges that will require lots of hardware. So what’s so special about it? Let’s check out the NYSE fact sheet (Fact Sheet):

Who is it for?
High-frequency traders and latency sensitive customers requiring a complete view of the NYSE Arca market

Uh,oh..sounds like something going on here.

What does it provide?
The aggregated market data feed provides a unified view of events, including depth of book (add, modify, delete orders), trades (with corrections and cancel/errors), security status, order imbalances and the PBBO (Protected Best Bid Offer).

Looks like what we have here is the next generation of super charged data feeds. Rather than having to combine all those millions of quotes and trades from the current separate feeds, NYSE will now deliver the information to its high-frequency clients in one neat super-fast package. Sounds like high frequency heaven. The arms dealer will soon be delivering a new weapon…pending SEC approval of course. And what are the odds that the SEC will actually object to anything that an exchange proposes?