Evolution of Exchange Technology

Terry Flanagan

The progression and evolution of exchange technology has resulted in the high speed markets seen today.

Market participants assert that the current state of the markets, which are invariably permeated by high frequency traders, is just the next step in the advancement of technology.

“High frequency trading is a part of the evolution of trading,” said Ed Provost, executive vice president of business development at the Chicago Board Options Exchange. “If high frequency trading was to be a detriment to the liquidity providing community, that would be a concern. We’re advocates of a strong liquidity providing community. We’re blaming high frequency trading for the volatility in the market place, when we know it’s really the structural issues in the economy.”

This is a sentiment often echoed by other exchange operators, including CBOE’s New York counterpart, NYSE Arca Options.

“If high frequency trading went away, you’d see fees go in the opposite side than where they’ve been going,” said Paul Finnegan, senior vice president at NYSE Euronext and co-chief executive officer at NYSE Arca Options. “You would see the spread get wider rather than narrower. You’re going down a slippery slope, as regulators go down this road without a full understanding.”

“The SEC needs to set a vision for market structure for how they want the markets to work in the future,” added Finnegan. “We always want liquidity. We have to educate regulators and policy makers. You can’t have liquidity without someone making money. If they can’t make money, then you have to have maker-taker pricing, which pays liquidity providers.”

Exchange operators’ actions have been a reflection of their sentiments. Many platforms are looking for ways to attract more HFT firms, with the ever-increasing emphasis on lowering latency and increasing speed. CME Group recently announced that its co-location services, which will include hosting, connectivity and support services, will go live on Jan. 29, 2012. It is one of among many exchanges worldwide looking to increase the speed and lower the latency of their trading platforms, which most directly benefits high frequency traders. Co-location facilities are located as close to their machine engine as possible, giving trading firms, including HFT firms, nearly instant execution times. HFT has grown to about 75 percent of trading volume in the U.S., according to industry estimates.

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