The SEC has announced that they will meet with the heads of the major stock exchanges on September 12 to discuss last week’s Nasdaq trading outage. According to the SEC, the meeting will address “the market dissemination system involved in last week’s halt, as well as other critical market systems and infrastructure issues.” While we wait over two weeks for this meeting to occur, we thought it would be worthwhile to examine a statement that one exchange boss recently made in a CNBC interview :
Bob Greifeld, NASDAQ CEO, 8/23/13
“We knew professional traders had access to individual data feeds, but the traditional long investor, retail investor now didn’t have the same information, because of that, we halted the market”.
“The high frequency firms would have access to proprietary feeds from individual exchanges. The consolidated feed which we operate had a problem, wasn’t giving quotes out. We had to halt the market because of that. We didn’t want to have a situation where information asymmetry, as you say.”
Please read that quote from Bob Greifeld again. They halted the market because market participants that subscribe to direct data feeds were seeing information that other market participants (who don’t subscribe to direct data feeds) couldn’t see. This begs the question: why shouldn’t markets be halted all of the time?
We ask this question because it is a known and undisputed fact that high frequency traders, who purchase direct data feeds and colocation space from the exchanges, can create their own faster quote than the consolidated, SIP driven quote. We discussed this issue in a paper that we wrote almost four years ago called “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading” :
“HFTs use Latency Arbitrage to re-engineer the NBBO from end sources directly versus relying on the publically available standard SIP quote. HFTs are able to do this by paying exchanges and ATSs for the right to locate their servers next to market center data servers and matching engines and the right to access raw data feeds. As a result, HFTs know with near certainty what the market will be milliseconds ahead of everybody else – valuable knowledge that HFTs take advantage of when they trade thousands of stocks, thousands of times, every trading day.”
And we were not the only ones to note the timing difference. Over three years ago, the SEC’s Concept Release on Equity Market Structure , noted the time difference between the direct feeds and the SIP:
“The fact that trading center data feeds do not need to go through the extra step of consolidation at a plan processor, however, means that such data feeds can reach end-users faster than the consolidated data feeds. The average latencies of the consolidation function at plan processors (from the time the processor receives information from the SROs to the time it distributes consolidated information to the public) are as follows: (1) Network A and Network B – less than 5 milliseconds for quotation data and less than 10 milliseconds for trade data; and (2) Network C – 5.892 milliseconds for quotation data and 6.680 milliseconds for trade data.”
More recently, a University of Michigan paper titled “Latency Arbitrage, Market Fragmentation and Efficiency: A Two Market Model” also discussed the timing difference:
“Given order information from exchanges, the SIP takes some finite time, say δ milliseconds, to compute and disseminate the NBBO. A computationally advantaged trader who can process the order stream in less than δ milliseconds can simply out-compute the SIP to derive NBBO*, a projection of the future NBBO that will be seen by the public. By anticipating future NBBO, an HFT algorithm can capitalize on cross-market disparities before they are reflected in the public price quote, in effect jumping ahead of incoming orders to pocket a small but sure profit.”
While it is true that the differential in time between the direct feeds and the SIP has been reduced, the fact remains that there is still a time difference. If Bob Greifeld and his fellow exchange bosses halted the market on August 22nd because some investors were getting information that others were not, then considering that a timing difference permanently exists in today’s equity market, shouldn’t they halt the market all of the time?