By now every investor has heard of HFT Algos running the markets. The Trader has covered the topic in depth over the past year. Nanex has been the company that has provided most of the information and charts with regards to the professional HFT crowd. Below is an excerpt from the must listen to interview published a few weeks ago on HFT, Algo, market microstructure and the FB event wort reviewing, with Eric Hunsander of Nanex. Via Erik Townsend of Financial Sense.
The full interview click here.
ERIK: Now, before we dive into the gory details of what happened that fateful day with the Facebook IPO, I want to start by giving our listeners a sense of some of the background issues that came into play that day. Now years ago, a given stock say IBM stock was only traded on one and only one stock exchange. So IBM’s listed on the New York Stock Exchange, so that means the New York Stock Exchange is the only place that you could go to trade IBM shares, but that all changed a few years ago. Please explain to our listeners how and why it changed; what is Regulation NMS and how things work today. [3:45]
ERIC HUNSADER: Regulation NMS is what was debated by the industry in 2005, 2006 and was finally implemented and rolled out in the first, second quarter of 2007. At the core of Reg NMS is this concept called the national best bid or offer, which each exchange trading a specific stock would submit their bids and offers; this information would be aggregated by what they called a SIP — there’s a lot of acronyms coming up here. SIP stands for Security Information Processor. And one of the formal names or actually implementation of the SIP you might hear is CQS, the Consolidated Quote System. That’s the same thing as the SIPs for a specific group of stocks. But anyways, so those SIPs would accumulate the bids and offers from all the exchanges, find the highest bid and the lowest offer and that would become the national best bid or offer so that an order from a customer coming to any exchange would have to trade at the best bid or offer before it could trade at a next lower price. That was called trade through price protection. And that is the core of what Reg NMS is all about. [4:58]
ERIK: So essentially what Reg NMS does is it provides the industry with a way to make it possible for a certain stock or other security to trade on more than one exchange. And by having a set of rules that provide, first of all, an advertised national best bid or offer that assures that any buyer or seller can get a price that they know was the best price available and that their trades will execute at that price. So even though there might be multiple bids and asks on different exchanges, the Reg NMS system is intended to make sure everybody gets a fair deal, gets a fair price and all their trades execute at the best available price from any exchange anywhere in the world essentially. [5:39]
ERIC HUNSADER: Correct. And by having a SIP that would collect the information from all the exchanges, an investor who wanted to receive and analyze prices on stocks wouldn’t have to go to each exchange separately and contract for their data feeds because it would be all available in the SIP. And the SIP would also serve as an audit trail, so that the SEC or anybody could really go back in time and see exactly what happened at a given point in time. [6:07]