Bringing parity to an uneven race
Where are the biggest US equity exchanges located? – If one were to ask this question to someone from outside the financial markets, most probably the answer is going to be – New York and Chicago.
If one has been following the market infrastructure of US equity market, one would know that New Jersey is the unlikely, but most suitable answer as this is where the beating heart of the exchanges--their data centers are located. They are at Carteret (Nasdaq), Mahwah (NYSE) and Secaucus (CBOE) to be precise.
Just have a look at this wonderful picture from Eric Scott Hunsader of Nanex. This paints the picture of the multi-tiered infrastructure that market participants are on, which gives an unfair technology advantage to the HFTs, and other specialist participants, over the main street investor.
The liquidity fragmentation caused by the existing 13 exchanges gets more aggravated with a few more getting added very soon, adding to the the latency challenge. You might remember reading about this latency issue and its impact in Michael Lewis’s ‘Flash Boys’. And how the shoe boxes at IEX, is being used to keep the faster ones at bay with a 350 micro second speed bump https://iextrading.com/behind-the-trade/ while entering and leaving IEX.
The Securities and Exchange Commission (SEC) has proposed the Market Data Infrastructure rule earlier this year and I am expecting the Competing Consolidator model proposed in the rule would encourage the Industry to collectively spend their engineering might to figure out how to make the US equity markets a more level playing field for the retail investors by reducing the difference in latency between various channels connecting the exchanges.
The fear is that, the proposed rule is expecting the consolidated feed to do too many things at the same time, and hence it might not catch-up with the low-latency exchange proprietary feeds. In a winner takes all race like the one we have in equity markets, there is no prize for coming second. More on the proposed rule soon.
Thanks, Rumman