More Than Speed
While low latency and high speed continue to be touted as some of the most important aspects of a particular exchange, some participants believe that it’s fast approaching a point of diminishing returns.
“I don’t think technology should be the holy grail,” said Jos Schmitt, chief executive officer of Alpha Group, during Markets Media’s Canadian Trading and Investing Summit. “The holy grail should be how to achieve best execution. Yes we need to reduce latency and upgrade technology. We should go from 400 microseconds to 1 microsecond. But that should not be the focus. We have more liquidity now, but the quality of execution has not improved. I’m not sure” more liquidity is better.
Lowering latency most directly benefits the high-frequency trading firms, who use their speedy connections to arbitrage price differences and collect rebates. Exchanges, which collect fees on transactions, have been keen to provide for this type of trader by offering co-location services. Exchanges worldwide are looking to increase the speed and lower the latency of their trading platforms, either through technology upgrades but also on offering close proximity hosting. 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 as much as 75% of trading volume in the U.S., according to industry estimates.
“We are broker that deploys a lot of technology,” said Nick Thadaney, chief executive of ITG Canada. ITG was founded as Investment Technology Group, and brands itself as a broker that leverages technology. “I don’t understand the unrelenting pursuit of the last microsecond. Retail traders and institutions don’t care about latency, only high-frequency traders do. Of course HFTs provide a lot of order flow. But retail and institutions, who are the actual buyers and sellers, are the real flow in the market.”
However, investing and building out technology can often have other beneficial effects as well, aside from helping the high-frequency trading crowd.
Speaking about institutional and retail investors, Robert Fotheringham of TMX Group say that they may not necessarily care about low latency, but they do care about liquidity. The TMX is working on a low latency connection between London and Moscow, which it asserts will help draw interest and liquidity from around the world toward Canada. “The marketplace benefits from globalization,” said Fotheringham.