Trading in Less Than A Blink of An Eye

On any given day, computer-driven trading can be as much as 70% of the total volume of the New York Stock Exchange.

Most of these trades are not the traditional buying or selling of securities based on analysis of the fundamentals or trends.

 Instead, quantitative models programmed to execute trades in milliseconds - or less time than it takes to blink your eye - are attempting to capture profits that humans cannot.

It has come to light recently that, up until this past week, Thomson Reuters had paid the University of Michigan $1 million a year for the right to distribute Michigan's Consumer Confidence Index to a select group of customers two seconds before its normally scheduled 10 am release time.

Two seconds may not seem like a lot to you and me, but to the quants it is everything, which is why the government has been attempting to stop the early release of data.

Here's what James Stewart wrote in his "Common Sense" column in the New York Times last Saturday:

On Friday morning, Thomson Reuters released the latest University of Michigan Consumer Sentiment Index, as it does twice a month. But this time was different. As a result of a settlement Thomson Reuters reached this week with New York’s attorney general, Eric T. Schneiderman, a select group of its customers didn’t get the two-second advance release they’d been buying. 
 

Two seconds may not seem like much, but for high-speed traders with supercomputers, it’s plenty. 

The difference was arresting. On Friday, just 500 shares of a leading Standard & Poor’s 500 exchange-traded fund traded during the first 10 milliseconds of the two-second window before the release of the University of Michigan data to Thomson Reuters’ regular clients, according to the market research firm Nanex. A year ago, on July 13, 2012, 200,000 shares traded during that 10-millisecond period, Nanex said. 

http://www.nytimes.com/2013/07/13/business/the-ethics-of-a-split-second-advantage-for-traders.html?pagewanted=all&_r=0 

I have written in the past about the incredible influence that computer-driven trading has had on the stock market.  However, when I read this article on Saturday, it was a reminder of just how much the deck is stacked against the individual stock trader.

Turns out, its not just the early release of economic data that gives some quant shops their edge.  Location can also be a plus, as this article in CNBC today points out:

Being the first to trade on market-moving information can be extremely profitable—and that's what's driving firms to invest resources in a continuing effort to slice the amount of time between information release and trade into ever thinner increments. All of it—the information's transmission, translation, and trading in a journey from Washington to market servers in New Jersey, New York and Chicago—happens faster than the speed of human thought. It takes a person 300 milliseconds to blink an eye. But the firms involved in this telecommunications arms race view a single millisecond as a margin of victory—or defeat. 

Although it seems like information travels on the Internet instantaneously these days, it doesn't. Data can't travel faster than the speed of light. So the telecommunications arms race in markets has become all about getting as close to the theoretical speed of light transmission time as possible—and putting computers as close together as possible, to minimize even the tiniest delays. 

http://www.cnbc.com/id/100880782#_gus

To me, there is a vague sense of unfairness in all of this.

It is not illegal, but being able to act on government or academic data before it is released to the public feels like insider trading.

Like it or not, however, that's the world we live in.