With the news that New York Attorney General Eric Schneiderman is looking into “products and services that offer faster access to data and richer information on trades than what’s typically available to the public,” we wanted to clear up a few facts.
Attorney General Schneiderman released a statement saying, “I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market” going on to refer to services such as colocation and market data feeds.
Contrary to AG Schneiderman’s assertion, colocation and direct market data feeds are available to all market participants, not just a select few. Not only are these services available, they promote efficiency and transparency. By making proximity and data available to all, colocation and market data feeds have further democratized market access.
Colocation is the practice of hosting a firm’s computers in the same facility as the exchange in order to reduce the time it takes to communicate with the exchange. It is the modern day equivalent to a firm having people on a trading floor. However, colocation is a beneficial evolution of the trading floor – allowing for many more participants than there was ever room for on the floor and ensuring that the space is offered and fair and equal terms.
Direct market data feeds are also a crucial component to today’s modern markets. Exchanges are required to send their best bid, best offer and last sale to the consolidated tape. This is often referred to as the public feed. The real-time public feed is not free for any user. Direct market data feeds from an exchange often provide much greater transparency than just the best bid, best offer and last sale. For example, an exchange provides depth of book (take a look at BATS’ book here to see depth of book: http://batstrading.com/bzx/book/SPY/) and provides all updates to the book.
Direct market data feeds are not limited in availability. In fact, they are available to anyone who wishes to subscribe to them. Many of those brokers who trade on behalf of individual investors make use of them. The information found in these direct data feeds provides much greater transparency, and transparency is one of the hallmarks of healthy markets.
The root of much confusion around these points stems from a fundamental misunderstanding of professional traders’ interaction with investors. There is a mistaken assumption on the part of many that professional traders using HFT compete with investors. This is certainly not the case. Professional traders compete with each other to provide efficient markets to investors looking to get into and out of positions. The fierce competition between professional traders results in better prices for all and helps to stabilize a complex market place.
These services are available to all, and fairly provide all participants the choice to invest in them. Individual investors can choose a broker who uses these services and thus can benefit from them directly. Furthermore, they allow professional traders to efficiently interact with the market, providing beneficial liquidity to all investors.
All fair-minded market participants can agree that as long as these services are available to all they are beneficial to the market. To the extent the services are not open to all, they should be made available or removed from the market.
TIMOTHY MASSAD, CFTC Chairman
June 3, 2015 Speech