Exchange records trade and disseminates quote simultaneously (as required by reg) to multiple third party recipients with no delay. This information is available at network connection point/device located at the Exchange facility to all parties. The role of the Exchange in this process stops here. What third parties use to transmit and how they process it is beyond Exchange control other than meeting minimum technical requirements. One recipient chose and invested in direct high speed connection to that information (HFT and others) and second chose to use slower standard connection and also processes and consolidates that information as required (NBBO) re-stamps it on its own computers and disseminates it. All parties involved source the information from the same point at the same time. The time difference shows up later and is result of network, processing, programming, distance etc. Exchange does not offer two different tapes - it is byproduct of access type and processing delay to primary information by third party. Re-stamping takes place on off exchange computer and this is beyond Exchange control. Since NBBO is official pricing tape it seems logical that regulation left big loophole requiring to disseminate quote "no later" instead of making sure that other recipients are not seeing that information before NBBO publishes it. One option would be to require exchange to wait for feedback from NBBO that quote has been published before sending it to other clients like HFT. As far as I remember issue with NYSE and other exchanges was order flashing to certain participants meaning that exchange gave them window into order flow for x milliseconds to accept or reject and then send it to matching engine. SAC is insider trading and I cannot find anything HFT related there. Similarly market news companies were disseminating information on preferential basis and it has been found questionable or outright illegal. Yes it is unfair system created by regulator and supported by infrastructure. Somebody just figured it out how to make money out of it but they should not be blamed for shortcomings of others. Remember in its pure form HFT does not have customer. After all this is Capitalism and free country. It seems then that primary beneficiary of this setup is broker who handles order flow or locals on the exchanges. They can subscribe to different feeds and and internalize customer orders on NBBO while trading on direct feed. HFT has no customers so they are going after each other or the brokers/institutions and probably that is why having their lunch money taken by HFT there is a push to ban it by institutions and brokers and general public just falls for it. For me and many others HFT is irrelevant other than decreasing cost of trading ( commission and spread). Fix regulations and infrastructure and check what brokers are doing when internalizing orders and engaging in naked shorting.
To be understand better what you are saying: So the direct feeds are the network connection point/device you say where the exchange's duty to report (as per regs) ends. The exchange has no responsibility for the accuracy of the SIP at all locations as per this paper: http://www.nanex.net/aqck2/4442.html If I have that wrong, then which (SIP or direct feed or something else) are you talking about in your answer that the public gets as per NMS regs in order to price their trades accurately. (" ....This information serves an essential linkage function by helping assure that the public is aware of the best displayed prices for a stock, no matter where they may arise in the national market system...... ") Do you have access to direct feeds in your own trading? And what was the fellow misstating in this link that got the new york attorney general concerned (since he was meeting the regs in your view)?: http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc
I would say that Exchange role ends at the network box to which other connect to receive data. This is the point where the race starts. Direct feed is just connection line to that box from outside (semantics even if this is just on the other side of the server room wall under the same roof). SIP is getting data at the same time from the same box. Both differ in technologies used and distance. SIP feed is not called direct feed for obvious reasons because it has been processed off multiple direct feeds to many exchanges. In my case (average investor) before I see quote it goes through more data processors, broker servers etc. and is further cleaned, processed and obviously delayed. We do not see NBBO but history of it even if we pay for "real time data". Confusing part is SIP. For me it is third party because it runs its own operations mandated by regulations. It has to consolidate data received from multiple exchanges and disseminate that information. Exchange has no control over SIP technology and just provides raw data as required with local time stamp (there might be other data not mandatory to disseminate but available to paying exchange customers or locals). Exchange does not have supervision over SIP data and no responsibility beyond that "box" network point. I do not see how Exchange can be responsible for NBBO or somebody using latency arbitrage between computer networks outside Exchange control if they provide data as required by regulations on equal basis at the "box" connection. Public orders are in general priced using SIP NBBO at the broker location (we are not members at the exchange and cannot trade directly). Some brokers will "improve" your execution quality by actually routing customer orders to exchanges/ECNs instead of internalizing and then collecting order flow rebates for themselves. Another words broker obligation is to execute at the current NBBO or better. It is obvious that NBBO is not direct feed and in view of the current information it has to be considered delayed feed. From TV discussion BATS vs IEX CEO's I gathered that BATS investors, locals can trade on that exchange in contrast to IEX. IEX guy alleged that BATS is pricing customer orders using NBBO which turned to be true at least for some of their physical locations until they switch to direct feed. If that is the case then the scenario of latency arbitrage (SIP NBBO vs Direct Feeds) would probably apply to certain BATS operations but still I do not see that as illegal but rather questionable. By pricing using NBBO BATS met minimum requirements of regulations. Attorneys would have to prove that there is time differential at the point of data dissemination and not at receiving end when quotes are available to general public or in case of ECN/Exchange that they misled customers or misrepresented their offerings which would be violation outside market regulations. I have no direct feed for many reasons like low capital to cost of such infrastructure, lack of sub/millisecond strategies etc. However, being collocated or renting server in proximity to exchange is possibility to consider because those services are much much cheaper nowadays and within reach (mostly second option). Unfortunately media and all others involved are not helping in clarifying what are the real issues in our markets. In my opinion HFT is a smokescreen, and for me is just a market noise on the tape. I suspect that the real culprit - naked shorting, order internalization and off exchange activities do not receive much attention. Because of that it is so easy to manipulate prices because what we see on the exchanges is just tip of the iceberg and real action is somewhere else.
I have a question, not sure if it is related to the 'jumping the queue' case alluded to earlier or not. IB has an order feature named 'hidden'. Does anyone know how this affects the queue? Could these 'hidden' orders be the ones mysteriously 'jumping the queue'? Thanks.
Not related. I believe hidden orders have less priority at equivalent price levels than regular orders. Hidden orders are the only way I know to avoid the annoying pennying robots.
hidden orders doesn't have any priority at all. ie-based on my experience "they" can trade thru your hidden order just fine on some other exchange(they now have 80 at their disposal). and this is where we( as a retail) are really boxed. you hide your order-you lose any priority. you show your order-in any case,where price is about to move in your favor-bots will be buying at your price (or 0.0000001 better(cause their price is "better" than yours and because of this- they have price priority)) and you will get nothing(or worse-1-2 shares and have to pay a full commissions on entry and exit) either way-you are f**d. this is my daily experience as a day trader for many many years(and it's getting progressively worse day by day) i also have suspicion that those hidden orders are only hidden for you and me somehow,when spread is wide on stock-they are sitting(and moving) right where my 'hidden' order is. yeah..it might be just another coincidence..
hahaha, strange. have been thinking and noticing the same. I can understand it when you get hit for 2 shares or so, then they know that there's a hidden order. Thats probably the purpose of those 2 share orders. "Market intelligence", placing costs on competitors, and (in case of a displayed 100 share order) taking that order out of the NBBO that requires round lots. You might want to investigate "all or none" or "minimum quantity" fields for your orders. But then I also repeatedly had the impression that my "hidden" order was somehow revealed even before it had interacted with anyone.
There are some interesting posts in this thread by trader422 about hidden orders being sniffed out by HFT (methods other than pinging with a couple shares): http://elitetrader.com/vb/showthread.php?t=255059&highlight=hidden
The Feds could fix this if they had the political will to do so. Just establish a single electronic market for each class of securities and abolish all the others. They would also have to ban internalization as well.