SEC Confirms Arbing NBBO Latency Was Distinct Possibility
One of the theories proposed by Zero Hedge and Nanex is that some of those who may have clogged the market with "quote stuffing" did so in order to benefit from arbing the immediately effectuated latencies in the NBBO and proprietary quote streams. We were immediately ridiculed by "experts" who claim such an arb is impossible. Luckily, the SEC confirms that not only is it possible, but here is how it very well may have happened, utilizing, what else, dark pools. But, as the SEC says, it didn't happen, because for it to be profitable only a select few must have been utilizing this strategy, when as the SEC so thoughtfully assumes, everyone was in on this criminal trade, thus removing all arbitrage opportunities. So all is well, because if there is one criminal in the market they all are. Brilliant.
A number of other hypotheses regarding the causes and implications of these data delays have been offered. One specific concern is that traders could take advantage of the timing delay between data reported to the consolidated feed and data reported on the proprietary feeds by buying securities at prices on one feed and selling securities at prices on the other. It generally is not possible to do this, however, since the consolidated feeds do not reflect a separate trading market from the exchanges. One cannot “buy” or “sell” at an exchange’s prices as shown on the consolidated data feeds separately from the exchange’s prices as shown on its proprietary data feed. All orders attempting to execute against an exchange quote in the consolidated data feed must be routed to that exchange where they will be matched in real-time based on then-available quotes at that exchange. These real-time exchange matching system prices may be different from the quotes in the consolidated data feeds if, as on May 6, the exchange is experiencing latencies in transmitting its data to the consolidated data processors. The exchange’s prices in the consolidated data feeds are quite literally inaccurate – they do not in fact reflect prices that are currently available to anyone at the exchange.
One potential exception would be a dark pool that executes trades based on exchange prices, but uses the consolidated data feeds to reference those prices rather than subscribing to the exchanges’ proprietary data feeds. In such a case, it could be possible for a trader to route an order to the dark pool hoping for an execution at a stale price and, if it received such an execution, to then route an order to an exchange to capture the differential between the current price and the stale price. We believe, however, that dark pools representing the great majority of dark pool volume subscribe to the proprietary data feeds so that the opportunity for this trading tactic is limited.
Moreover, if there are latencies in transmitting exchange data to the consolidated data processors, investors who make real-time decisions to buy or sell based on observed prices in the consolidated feeds (as do most individual investors) are likely to find that their orders are not filled in the manner expected, and these investors will be at a disadvantage compared to those making decisions based on proprietary feeds. This is one of the reasons data delays on the consolidated feed should be kept to an absolute minimum.
And now, be confident: after all these people are your regulators. And they are well on top of stuff.