Doug Friendenberg, All About Alpha, Metamorphosis in HFT, here. So just make all machines that talk to the exchange have a GPS. Tag all packets with your (the machine’s) GPS location then the exchange can set the priority of access to the exchange matching engine with a standard delay/latency X ns. The machines too close have to wait for the standard latency X. The machines far away get some compensatory priority, up to some limit determined by where the packets says it is from. If your packet lies about its origination location you owe the exchange a penny in the Liar’s Jar for each liar packet. Exchange resets X every morning between (Xmin, Xmax) randomly. Or maybe have a premarket auction to set X(12Jan2015) for the trading day so the little guy has a chance. Kills the old RBC patents. Exchanges don’t have to do dumb stuff like coil fiber delay loops, not have wireless exchange access, and worry about machine room location. Make X depend on the exchange and the trading volume X(Mahwah, trade volume, 12-Jan-2015). Get some interesting structure math in vanilla equity trading, Throwback Thursdays, X = Xmin + epsilon for the open and close. Randomly select one packet from zip code EIEIO every day, called the Michael Lewis Packet, and give it top priority in the queue for the exchange matching engine so its super fair. Hey you never know. You are welcome!
We asked Brad about a criticism leveled at Flash Boys on Zerohedge by Christopher Whalen, who wrote: Indeed, the real scandal is that all of this has been entirely blessed by the SEC, FINRA and the major exchanges and is described in the voluminous public documentation for permitted order types. But suffice to say, virtually nobody in the Big Media or at most Wall Street firms understand any of this or knows, for example, that there are over 100 different order types allowed by the SEC and FINRA under current law and regulations.
Brad couldn’t comment on Michael Lewis’s (or others’) editorial decisions. He did say in response, “If I were sitting at the SEC, I wouldn’t have been able to figure it out.” He further noted that regulators are in a tough spot because they rely on market participants to inform and explain to them what’s going on. Which could mean that the foxes are running the chicken coop indirectly.
The intellectual mismatch between Wall Street and government regulators isn’t particularly new. Nor should it be surprising when guys making six and seven figures to play the game win against a team lucky to make five figures for the most part, with so little critical experience that they have to rely on the regulated to advise how and what to regulate. The only real question in this scenario is why on Earth HFT firms would object to government regulation when they have so much input. One might also wonder why non-HFT investors, once they begin to suspect that they are disadvantaged by the rules, don’t begin to demand a seat at the regulatory table, so as to combat the gaming of the system.