Invariably, when you are tasked with focusing on many things, concurrently, you don’t focus on any of them particularly well. Is this the case with our regulators right now? They are focused on Dodd-Frank (they have to write over 100 laws for that bill). They are focused on Swaps. They are focused on flash orders in the equity market, and flash orders in the options market (as an aside… how does one say that two tiered markets are unfair over here, but fair over there? Just sayin’). They are focused on market maker obligations, circuit breakers, consolidated audit trails, expert networks, insider trading, that Raj guy, high frequency trading, and latency arbitrage.
The SEC is challenged with reworking and correcting a few things that have gone plum loco in the last few years. But before anyone critiques the Chairman for one minute, please be sure to critique her predecessors for ten minutes. We don’t envy the job of our regulators right now, and we can’t begin to guess how tough a job it is dealing with all those dang details. However, we do worry that by focusing on so much, so little will be ultimately focused on properly, all while precious time ticks on by. See Reuters Article Here. By the way, that is a Martin D-15 in the picture above, for those of you who love mahogany or guitars.
Pertinent to the above discussion (particularly latency arbitrage), the NYSE has taken vast strides in the past few months to minimize the differential between the speed some trading firms get their market data (via direct feeds and co-located servers) versus others getting their data via the SIP. We have written about this extensively, and our views on the differential are quite known to many of you, as well as our regulators. A WSJ article yesterday (Read it Here) makes much of this disparity reduction. Why, just a few years ago the difference in speed was 800 milliseconds (8/10ths of a second), and by June 2011 that difference will be one millisecond. Nothing to see here; the difference is gone. Right? No.
I would like to bring up two points: First, latency-sensitive HFT is playing in the low microsecond arena. In October, Nasdaq OMX announced a new trading system that can handle a trade in less than 100 microseconds, trumping the LSE’s 126 microseconds, announced a few weeks earlier. Reuters even ran a piece in the recent past which detailed how one HFT firm, Lotus Capital Management, went through painstaking measures to reduce 5 microseconds from its router, as another competitor was beating them to the quote by 3 microseconds. Billions of dollars are being spent to save millionths of a second. Think about that when you hear that the difference will only be a thousandth of a second next year. Second, if the difference of one millisecond means so little, as Jamie Selway (someone we do respect even if we disagree from time to time) states in yesterday’s WSJ article,
“I don’t view this as righting some tremendous wrong that’s hurting retail investors,” he said. “Most people probably overstate the problem associated with the consolidated feed,” which often supplies data for people using less speed-sensitive strategies, he said.
then will someone please explain Mahwah to me? Will someone explain the data-center-building-frenzy around the globe, where large capex is being made in order to suck in colocation revenue? Will someone explain the need for Chi-NYC $1billion new underground cables that shave 3 milliseconds over the existing fiver routes? Or the Telegeography 2010 Submarine Cable Map below?
Let us not be distracted. Let us not lose focus on the concept of fairness. Let us not lose focus on the real purpose of our capital markets: capital formation and economic growth. While trading is important, and hyper fast trading is a natural evolution of slower predatory trading of the past, the fact that it is the bulls-eye of all for-profit exchanges is cause for pause.
Where we left off 4:00pm EST:
INDU 11,255.78 +249.76
SPX 1,206.07 +25.52
CCMP 2,549.43 +51.20
Futures now at 7:30am EST:
Key Data out today:
08:30: Initial Jobless Claims
08:30: Continuing Claims
10:00: Pending Homes Sales
Since the prior close, some key stories:
– 30th consecutive week (starting May 6th) of domestic equity fund outflows. Who is buying?
– Euro Up. ECB Meets. Stocks and futures globally higher even off of yesterday’s move.
– Federal Reserve May Be Central Bank Of The World (Bloomberg). Yay.
– NY’s Nassau County Borrows to Pay Tax Refunds. Reverses their September claim that they would not do that.
– From Craig Cummings at Cantor: “Can anyone believe OTB in NY is going out of business? A bookie? Going out of business? You give me a month and 10 guys I went to High School with and I’ll have that thing making money.”
– GSCO calls for S&P 1450 in 2011. Due to earnings. (they didn’t call this until after yesterday?)
– BofA calls for S&P 1400 in 2011. Due to earnings. (they didn’t call this until after yesterday?)
– WSJ reports that Congressional aides have begun negotiations to extend Bush Tax Cuts on a temporary basis.
– Fed’s Emergency Loan borrowers (ie free money) included McDonalds, B of A, and Harley Davidson
– Banks are in settlement talks with US Regulators on CDO practices.
– Gold demand in China surges.
– The best way to save the Eurozone is to Create a Eurobond : Read This
– Aeropastale co-CEO departs.
– November Same Store Sales this morning!!!!!
– Krispy Kreme raises outlook.
Pre-market: CONN, DLM, GIL, KR, MPR, PTRY, TOL, UTIW, FNSR
After the Close: AVGO, FLOW, MITL, NOVL, SWHC, PAY, ULTA
Significant Movers This Morning:
PSS +16%, RGC + 8%, FNSR +5%, KKD +4%, OXPS +4%, TOL +3%, CCBSH +3%, LTD +3%, ARO -8%, SEP -4%, VRX -3%, VSH -5%, SQNM -8%, SMTC -4%