Exchanges Embrace Speed

Terry Flanagan

While there are arguments to be made on both sides of whether or not high frequency trading brings positive or negative effects to the market, exchanges and trading platforms often embrace high speed traders.

“We’re living in a different world than what we grew up in,” said Gary Katz, president and chief executive officer of the International Securities Exchange, during a conference at Baruch College. “It’s completely different than what we knew even 10 years ago. ISE launched in 2000, but 2 years before that, the reason we couldn’t come to market at that time was because modem speeds were too slow. This is the world we are in today. You have instant information, you know how much your portfolio is worth any time, instantaneously. These are the lowest commissions that have ever been charged, all of that because of the structures created. It’s an ever changing process, we need to keep moving forward and embrace the technology available to us.”

Exchanges worldwide are looking to increase the speed and lower the latency of their trading platforms. In addition to developing new matching engines, exchanges have also welcomed high frequency traders by establishing colocation facilities which are located as close to their machine engine as possible, giving trading firms, particularly high frequency firms, nearly instant execution times. The service has become a lucrative source of additional revenue for exchange operators, as they capitalize on the quest for speed sought by active, high-volume traders. CME Group said that it expects to generate between $30 million and $40 million from co-location services when they launch in 2012.

Despite the proliferation of high frequency trading, which some industry estimates say makes up 75 percent of equities trading volume, market participants remain wary on regulating it and say it needs to be better understood.

“You have to let the rules of engagement evolve,” said Alfred Berkeley from Pipeline Trading Systems.  “If an advance has unintended consequence is unfair, then you can either acquire those capabilities or have an intermediary create rules to create a level playing field. I don’t think we should overregulate, I think we should ask for more innovation.”

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