Finally: Debate re High-Frequency Trading Includes A Tangible Solution

tabb forum logo Excerpt courtesy of TABB Forums April 21 submission by Chris Sparrow, CEO of “Market Data Authority” a consultancy that provides guidance within the areas of equities market structure, transaction cost analysis and “best execution.”

MarketsMuse Editor note:  below snippet is a good preview to the most recent “short-form white paper” written by Mr. Sparrow in connection with the ongoing brouhaha re high-frequency trading aka HFT. The submission itself inspired a broad assortment of comments from industry experts..and, having been considered a “market structure expert” in a prior life, MarketsMuse editor says “overlook the ‘techno talk’, its worth hitting ‘read more.’

“Eliminating Unfairness: Creating a Protocol For Synchronized Period Trading”

The goal of this piece is to describe at a high level a protocol that could be introduced to allow for a multi-venue system operating synchronized batch auctions. The motivation for this protocol is to eliminate any advantage from the asymmetric distribution of order book information – i.e., trade and quote updates. No attempt is undertaken to control other types of information that may be relevant to trading.

The protocol should allow for competition of trading venues and not discriminate against any type of market participant. Further, the protocol is suggested only as an option that could be used by venues that want to participate.

A strong motivation for creating the protocol is the perceived “unfairness” that is present in the existing market structure, where some participants may be able to get faster access to trade and quote information than others. The result has been a perceived erosion of confidence in the equity markets. Other externalities that exist in the current system include the need to store vast amounts of data generated from continuous trading and a technological arms race.

An inherent assumption made in presenting this protocol is that it would be advantageous to the industry as whole to implement such a protocol, presumably by promoting confidence in the “fairness” of trading and the reduction of externalities that exist in the continuous model. Ultimately, the “market” can determine success or failure.

The model consists of a series of batch auctions that would be conceptually similar to a series of opening auctions, with the added feature that these auctions will occur “simultaneously” (i.e., within defined windows of time) across multiple trading venues in a synchronized fashion. A key feature is that information about order books and executions will be released only within a defined time window.

For the entire article, including the multitude of comments submitted in reply, please visit TABB Forums  (registration is required..but it is free)