Glitch Eh? Uh huh....
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2018-02-13 07:00 by Karl Denninger
in Market Musings , 251 references Ignore this thread
Glitch Eh? Uh huh....
[Comments enabled]

It's just a "glitch", you see....

Five years ago, the world’s largest exchange operator vowed to fix a flaw in its systems that allowed high-speed traders to infer the direction of the futures market a fraction of a second before everyone else.

Now, the defect is back at CME Group Inc., traders say. And some allege it is yielding rich profits for ultrafast firms at the expense of ordinary investors.

The problem arises from the two ways that CME distributes information about a trade. One is the private confirmation messages that the exchange sends to the buyer and seller in each transaction. The other is the public data feed that reports trades to everyone active at CME, a Chicago exchange where an average of 19 million contracts changed hands daily in January.

Sometimes, a firm will receive the private confirmation of its trade just before it is reported over CME’s data feed. During that delay—called a “latency”—an ultrafast firm can deduce that the market is about to move up or down, and quickly buy or sell to profit from that information, traders say.

Even better you can actually trick it this way.  That is, you can put a "feeler" order in and learn whether the market moves before anyone else finds out if your confirm comes back first.

This then allows you to trade with or against that fact before anyone else knows it happened and effectively steal from the other market participants.

Why does this sort of thing happen at all and why isn't any firm caught exploiting such a thing, if it's a "flaw" and not intentional, result in said firm being immediately shut down and all of its executives indicted since that's a clear and obvious cheat?

For that matter, why does the SEC allow location to matter?  Why is spending millions to shave off microseconds a profitable enterprise in the first place?  Only because it privileges you by getting data before everyone else.

This would not be hard to resolve.  Have one feed, with the bandwidth delay product known to each of many distribution sites in the US.  Insert an intentional delay line so that the data comes out at each at the same instant.

End of problem -- and advantage.

There's utterly no reason to allow exchanges of any sort to run their own data feeds, and especially not to allow them to sell faster ones.  There should be one consolidated data feed and it should be emitted from all reasonable places in the United States at the same time.

Yes, I know you can't get exactly that in all places at once.  But you sure can do it in Chicago, New York, DC, San Francisco, Los Angeles, Atlanta, Miami, and a few dozen other places.  This should be a public infrastructure that is heavily policed on a second-by-second basis to insure that it's actually fair and that nobody gets the data first by paying or spending more money beyond some baseline that any modest-sized trading firm can trivially afford.

Instead of guaranteeing and policing fairness the SEC, CFTC and other regulators look the other way while various firms find ways to rip others off.  May I remind you that for every dollar some company makes by doing this sort of thing someone else loses a dollar.  That someone is probably you and while the theft is diffuse it is happening and you're the ones losing if a handful of rich hedge funds are winning.

If we had anyone who gave a crap about this the firms involved would be prosecuted and the exchanges punished.

But will either happen?

Probably not.

After all, the entire business model in this country now is scam fast, scam often and scam bigly.

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