Will Nasdaq Be The Next Casualty Of The SEC's Anti-Latency Arbitrage Push?
Back in 2009 Zero Hedge was first the only, and shortly thereafter, one of very few non-conformist voices objecting to pervasive high frequency trading and other type of quantitative market manipulation in the form of Flash Trading (which has recently reemerged in yet another form of frontrunning known as "Hide not Slide" practices) quote stuffing, and naturally latency arbitrage: one of the most subversive means to rob the less than sophisticated investor blind, due to an illegal coordination between market markers, exchanges and regulators, which effectively encouraged a two-tier market (one for the ultra fast frontrunning professionals, and one for everyone else). A week ago we were amused to see that the SEC charged the NYSE with a wristslap, one for $5 million dollars and where the NYSE naturally neither admitted nor denied guilt, accusing it of doing precisely what we said it, and all others, had been doing for years: namely getting paid by wealthy traders, those using the prop data feed OpenBook Ultra and other paid systems, to create and perpetuate a two-tiered market, all the while the regulator, i.e., the SEC was paid to look the other way.
The graphic summary of the empty action against the NYSE which will do nothing to change the broken market:
This action was nothing but a desperate, and futile, attempt to regain some investor confidence in the market. It has failed, and since said "enforcement" action has done nothing to restore confidence, expect to see more exchanges slapped with fines for actively perpetuating latency arbitrage opportunities for "some" clients.
Well, since the SEC will be desperate to come up with more means of "restoring credibility" of both the market and its regulator, another exchange it may want to look at is the NASDAQ, which as Nanex demonstrates, may well have been engaging in comparable (most likely not pro-bono) latency arbitrage benefitting some: those paying for its direct feed aka TotalView, and thus not harming others, or those relying on the Consolidated Feed (UQDF) for data dissemination.
TotalView vs Consolidated Feed
In Facebook at 13:50:01 on May 18, 2012, when we compare Nasdaq's quote sent to the direct feed (TotalView) with the same quote sent to the Consolidated Feed (UQDF) we find a difference, or delay, of at least 120 milliseconds. That is, quotes sent to the direct feed appeared 120 milliseconds before the same quotes appeared in the consolidated feed. Comparing quotes and trades from other exchanges allows us to rule out the consolidated feed causing this delay. In other words, the delay must have occurred sometime before it reached the consolidated feed processors. Last week, the SEC fined the NYSE for sending a quote faster to their direct feed than the consolidated feed.
The first 2 charts compare the Nasdaq Quote from TotalView (Red) and the consolidated feed (gray). All charts show data at 1-millisecond intervals over 1/2 second of time.
1. Nasdaq Quote spread from TotalView (red) and the Consolidated Feed (gray).
The offset of the gray shading to the right of the red shading represents the amount of delay.
2. Same as chart 1, but includes trade executions. Data from Totalview is red, data from Consolidated feed is black/gray.
Note how trade executions line up with the direct feed, but appear ahead of the consolidated quote.
For more visual proof of latency arbitrage via Nasdaq go here.