Guest post by Saluzzi of Themis Trading.
Poor Investor Nemo. He swam away from our shark-infested capital markets a few years ago, as all the HFT made him dizzy and messed with his sonar. Not to mention his having to deal with that forgetful and gullible blue fish, Regulator Dory. Nemo thought he finally would have a little peace, but it was not to be. You see, the Summit NJ firm, Hibernia Atlantic, has just hired a Canadian research ship, Coriolis II to survey sections of the north Atlantic continental shelf, where Nemo is currently residing (these colder waters have in fact become warm due to global warming from all the strip mall stock exchange server farms).
Why exactly is this Canadian vessel surveying Nemo’s new home? Well, Coriolis II will survey the under-sea northern continental shelf because Hibernia Atlantic is going to put in a $300 million transatlantic fiber optic line, called Project Express, and the line will provide a more direct route between financial markets in New York and London. Read about Project Express in this Bloomberg article, Trading at the Speed of Light.
Only a small group of high speed trading firms will pay the steep fees to travel on this HFT superhighway. The fees to travel through this undersea cable will allow HFT firms to cut the speed of trading between New York and London from 64.8 milliseconds to 59.6 milliseconds! That may not seem like a lot of latency savings, but rest assured it is, according to Joseph Hilt, senior VP at Hibernia:
HFT-zero or negative economic value to stock pricing (as nobody can react to 10000 quotes per second per stock)
We have spent the last 24 years working with real-time market data on a tick-by-tick basis. We monitor our commercial datafeed in real-time to stay on top of market changes or issues. This past year, we have spentconsiderable time and effort studying the relentless growth of equity quotes. Based on our findings, virtually all of the additional quotes contribute zero or negative economic value to stock pricing, because they are either way outside the market or end up expiring before any investor or trader could possibly act on them. Furthermore, we can’t find any self-limiting mechanism in place that will ever put a stop to this unnecessary andexpensive growth of misinformation. The only thing that prevents a sudden explosion in quote traffic is the capacity limitation set by SIAC which runs the Consolidated Quote System (CQS) for the exchanges.