The need for direct feeds

nitro

nitro

"Timestamp Fraud": A Rigged Market Explained In One Simple Animation

SIPvsDirect.o.gif


http://www.zerohedge.com/news/2014-...-rigged-market-explained-one-simple-animation
 
I think "Fraud" or "Rigged Market" is a bit of a stretch. I just don't know an alternative to this system exists. Would the alternative be that HFTs have to connect to the SIP Tape A feed vs directly to the exchange?

I actually feel like the collocation environment is relatively fair. If you approach Exchange A and say that you want to collocate and connect to the direct feed, their sales guys are gonna eat it up. It's not like this is a service exclusive to a few HFT companies. Of course it's going to cost a prohibitively high amount of money for retail traders, but is it really realistic to expect a 10 or 40 GB/e connection and rack space in a very high demand facility to be available for an affordable price for an individual trading a 25K account? Just the power bill costs more than retail traders pay for data. The vast majority of retail traders don't have the technical competency to exist on an equal playing field with HFTs, much less the capitalization. Neither of those things make this situation inherently unfair in my mind.

Ignoring the above limitations for most people with collocation, it's important to understand that competing in the HFT space takes doing a myriad of nontrivial things right at the same time. Paying for colo is the cheapest part of becoming competitive. Software developers who can implement a FIX engine, FPGAs, the latest 10 GB/e switches, consultants/systems people who understand the linux kernel, and microwave connections to other exchanges cost literally hundreds of thousands more a month than the costs of collocation...and we haven't even discussed redundancy yet.
 
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How is that any different from offering the Non-farm Payroll report 1 day/minute/second/millisecond/etc early if you are willing to pay $X for it?

Could you not again justify that it's acceptably because retail traders don't have the expertise & capital required to act on an early payroll report, latest hardware, etc.
 
cjbuckley4 said:
I think "Fraud" or "Rigged Market" is a bit of a stretch. I just don't know an alternative to this system exists. Would the alternative be that HFTs have to connect to the SIP Tape A feed vs directly to the exchange?

I actually feel like the collocation environment is relatively fair. If you approach Exchange A and say that you want to collocate and connect to the direct feed, their sales guys are gonna eat it up. It's not like this is a service exclusive to a few HFT companies. Of course it's going to cost a prohibitively high amount of money for retail traders, but is it really realistic to expect a 10 or 40 GB/e connection and rack space in a very high demand facility to be available for an affordable price for an individual trading a 25K account? Just the power bill costs more than retail traders pay for data. The vast majority of retail traders don't have the technical competency to exist on an equal playing field with HFTs, much less the capitalization. Neither of those things make this situation inherently unfair in my mind.

Ignoring the above limitations for most people with collocation, it's important to understand that competing in the HFT space takes doing a myriad of nontrivial things right at the same time. Paying for colo is the cheapest part of becoming competitive. Software developers who can implement a FIX engine, FPGAs, the latest 10 GB/e switches, consultants/systems people who understand the linux kernel, and microwave connections to other exchanges cost literally hundreds of thousands more a month than the costs of collocation...and we haven't even discussed redundancy yet.
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The equities market is "tiered" IMHO. Probably a good idea to stick with futures.
 
Gambit said:
Nitro, does CME distribute data in this manner? I assumed that anybody colocated at Aurora would get data at the same time.
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Gambit right the CME is fair in this way. However, note that what that article is referring to is not timestamping at the exchange. It is timestamping at the "aggregators". I suspect that the futures aggregators are not this blatantly bad, but I am not sure. Equities trading being the oldest in the industry should be the most competitive up and down and side to side. In fact, at every step it is the most expensive. Lobbies, and the 401K is a free ride to the exchanges...

Basicallly it is saying that unless you have a direct connection, you are fooling your algos if they are dependent on accurate millisecond timestamps. It doesn't really affect people that are clicking a mouse.
 
Gambit said:
The equities market is "tiered" IMHO. Probably a good idea to stick with futures.
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That's what I'm doing, yes. With regard to CME distributing data, they distribute in a "fair" manner as far as this above example is concerned. All the data comes from one location (Aurora) via their CME Direct A&B feed. Functionally, it's no different as HFTs obviously colocate there and retail traders need to wait for their data provider to reserialize it. A screen trader is at the exact same functional disadvantage, but that's not gonna enter into the conversation here I would imagine.
 
cjbuckley4 said:
That's what I'm doing, yes. With regard to CME distributing data, they distribute in a "fair" manner as far as this above example is concerned. All the data comes from one location (Aurora) via their CME Direct A&B feed. Functionally, it's no different as HFTs obviously colocate there and retail traders need to wait for their data provider to reserialize it. A screen trader is at the exact same functional disadvantage, but that's not gonna enter into the conversation here I would imagine.
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True but I do think it is a lot cheaper to get lower latency colo in the futures market just by the virtue of there being a single exchange as opposed to the fragmented equities market.
 
paperbid said:
How is that any different from offering the Non-farm Payroll report 1 day/minute/second/millisecond/etc early if you are willing to pay $X for it?

Could you not again justify that it's acceptably because retail traders don't have the expertise & capital required to act on an early payroll report, latest hardware, etc.
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You make a decent point, but your example is a straight up quid pro quo, which is clearly unfair. In the case of the collocation argument, there's just no way around the fact that sophisticated traders are going to continue to devise ways to be faster than undercapitalized or less competent traders. Move all the exchanges to one building or make HFTs trade only on the Tape A as I suggested? That's just the situation at CME, so to the extent you believe that's fair, it will be, however HFTs will still have a higher degree of expertise and will still pay the brightest minds to be the fastest around. Eliminate collocation all together? Prepare for a real estate land grab around exchanges that would make the monopoly Guy's head spin.

The situation with equities is inherently biased toward those who can afford to play, but any industry is gonna have economies of scale and entrenched entities who got in early, that's just business. If you want something more akin to fair, the CME offers that in a lot of ways, but it's still gonna have the more sophisticated traders dominate the market making and stat arb opportunities.
 
Gambit said:
True but I do think it is a lot cheaper to get lower latency colo in the futures market just by the virtue of there being a single exchange as opposed to the fragmented equities market.
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You're absolutely right. Back when I had delusions of doing this independently right after I graduated (a month ago), I was restricting my interests to products on CME with a high level of price discovery taking place on GLOBEX vs their respective spot markets for this exact reason. I bet you can still find a fairly profitable liquidity adding strategy or two with a good retail FCM and TT or Rithmic if you colocate in Aurora and focus on being smart rather than fast. Market making is an extremely competitive game though. I may have just been fooling myself.
 
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