“Low Frequency Trading” and Other “Innovations”

Let’s take a little diversion from the clown act in the House of Representatives.  (I’m talking about you, Rodney Davis.  Grow up and act like a real Congressman.)

In earlier posts I railed about how electronic markets are rigged through corrupt rules and unfair technological edges. These markets favor speculation over investment, and cheat almost everyone on almost every transaction.

I lauded proposals to create better markets, perhaps by taxing short term investments (i.e., a significant tax on assets held less than a half second, or something like that).

As I hoped and expected, we are seeing other initiatives to create better markets for actual investors, not just traders.

Out of the currency exchange arena, major banks in London banded together to create an electronic exchange, ParFX, designed for “low speed trading.”  The basic idea is to inject a 20-80 msec random delay into transactions.  This simple mechanism defeats many forms of cheating (“latency arbitrage” et al.)  So far, this is only used by member banks, but is supposed to be open to all Real Soon Now.  We’ll see if this flies.  (Already it has caused competitors to emulate the idea.)

A similar effort out of Canada, a new electronic market, IEX, has emerged.  The basic idea is to defeat technology based cheating by introducing small, random delays into the system.  These make it impossible to front run, and negate any advantage due to geographic location.  Also, IEX claims to have the same rules for everyone, and doesn’t have a complex array of order types.  That is, there are no “special” transactions, custom designed by favored customers, to enable them to cheat.

Up to now, IEX isn’t really a going concern, so we don’t know if it will work or can attract enough business.  Some observers consider the innovations mostly “marketing” (and they definitely have a lot of marketing going on); viewing their “innovations” to be more significant psychologically than economically.  Maybe so.  But if I had any say over how my savings were invested, I’d want them to use something like IEX, if possible.

A slightly more exotic approach, media reports describe a new exchange, Tripleshot, which is said to prevent information leaks.  Based on press releases, it seems that many details are anonymized before a trade, to prevent others from front running and otherwise gaming the system.  There isn’t enough real information to know for sure what they are doing or how well it works.  But it is certainly something to watch.

Overall, it’s not too surprising to see that smart, rich, people are not amused by dishonest electronic markets, and are doing something about it.  We’ll all stay tuned to see how this works out.