Military Laser Technology Latest Edge In HFT Wars

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As the need for speed in high frequency trading (HFT) intensifies, with the difference between success or failure often measured in milliseconds, a Chicago company is now linking the NYSE Euronext (NYSE:NYX) with the NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) through laser technology used in U.S. military jets — and regulators watch developments with a wary eye.

Speed to facilitate arbitrage strategies

This March a small Chicago technology firm, Anova Technologies, plans to install laser devices linking the NYSE Euronext (NYSE:NYX)’s Mahwah, N.J. facility with the NASDAQ OMX Group, Inc. (NASDAQ:NDAQ)’s Carteret, N.J. facility, according to a report in The Wall Street Journal.  With such a high speed link between the two stock exchanges, HFT firms, operating with a millisecond edge, will be able to more effectively execute spread trading strategies that buy a stock on one exchange and sell the same stock on another exchange, benefiting from momentary price discrepancies between the two trading platforms.  The new technology is said to reduce the delay between traders on each exchange to the speed of light.

The WSJ article comes on the heels of another article from the newspaper noting that HFT firms are receiving market moving data such as earnings reports before general investors.  The article said HFT firms receive early earnings releases through Business Wire and the ADP monthly employment report.

Early release of jobs numbers

In 2013, professional traders along the yield curve had complained of irregular trading just before official government unemployment numbers were released.  Typically before a key economic number is released, the price of financial products doesn’t decisively move in one direction.  In 2013 traders began noting a sudden and forceful price move that preceded  release of the jobs number.  The directional price movement before the number’s release was typically in the same direction that occurred after the number was released, leaving skeptical yield curve traders to wonder if somehow HFT firms received the numbers early. The U.S. Labor Department was later criticized by the Office of the Inspector General for releasing its unemployment numbers to the media before the full public release, but no link to traders was formally established.

HFT programs typically benefit from an edge in speed of receiving information when compared to the general investor.  The race for speed comes with significant costs to the HFT firms, which is hurting the HFT industry along with increasing regulation at the same time talk of a potential transaction tax could effectively eliminate the practice which accounts for nearly 50% of exchange volume.

Regulatory concern for HFT

Regulators, concerned HFT could lead to disastrous consequences, particularly in a flash crash where stock prices can suddenly move significantly lower, are grappling with the speed issue and also the ability of HFT firms to unduly move the markets, reported in ValueWalk here, here, and here. On Monday the U.S. Commodity Futures Trading Commission held a new inquiry into HFT, reported in Reuters, where the industry’s defenders and critics spoke out.  “Criticizing HFT has become a cottage industry,” Richard Gorelick, chief executive of high-speed trading firm RGM Advisors, was quoted as saying.  He added that regulators would see through “fear mongering and hype” when developing new rules.

Caitlin Kline, derivatives specialist for Better Markets, which typically promotes active market regulation, noted it is important for the CFTC to assess a variety of issues, including its definitions of banned practices like front running.  High-frequency traders are “effectively are able to see the future” when they digest information faster that other investors, she was quoted as saying.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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