I read somewhere this week a statement that effectively said
speed enhances execution quality – and I suppose in a way it does. It can, for
example, ensure that the message traffic associated with trades is processed
quicker, enabling the next leg of the execution to take place.
There is also the fact that with fast technology a
participant can execute across multiple counterparties and venues – although
there are more than a few LPs who would argue this is market abuse 101.
The race to zero in speed terms has, historically, largely
by-passed the FX market, thanks partly to some careful ring fencing of the
uber-fast players onto certain venues and more latterly via the deployment of
speed bumps. And as a small digression I have to say I looked with no little
irony at developments in the US equities market – that paragon of all that is
good in market structure according to some US regulators of the past – as the
speed bump suddenly became a good idea!
I tend to roll my eyes when people talk to me about how fast
they are because – and this is a recent theme of this column – generally
speaking they are all institutional players. Likewise, those who often complain
about the cost of trading with faster traders are from the institutional space.
In other words, why should we care?
I cannot repeat it enough, if you are on an expression of
interest venue why should you care if the person the other side is quicker than
you? If you want to buy somewhere, put the bid in, get hit, move on.
Equally, if you are a market maker then understand that it
isn’t always going to go your way, but if you are getting sniped regularly by a
certain counterparty get rid of their credit line if it’s disclosed, and if it’s
anonymous talk to the technology provider and have the counterparty taken off
More pertinently in all of this, we are talking about
institutions and businesses that are making hundreds of millions of dollars a
year. I repeat, who cares if they get nicked for a few 10ths of a pip? They’re
big enough and ugly enough to do something about it, and if they don’t do
something – well frankly they deserve to lose the money because to paraphrase
from an all time great(!) movie, their egos are writing cheques their
technology can’t cash.
Listening to complaints from businesses making so much money
reminds of the occasional drama in the US when the latest negotiating round in
the NFL comes around over pay. We are treated to the sight (and sound) of
multi-millionaires arguing with billionaires over who gets more money. Who
A more serious observation on the question of speed and a
race to zero is that in the midst of this race there is a rather important
segment being left behind – the customers. Those people we all purport to care
so much about.
A friend recently explained to me the challenges of having
customers whose technology cannot accept market data updates more than five
times a second – these people do not care how fast things are – they only care
that when they want to deal they can do so (with no rejects!!!)
It strikes me this is yet another example of a market that
is bifurcating, with professional traders (the noisy segment) going one way and
the hedgers (the subdued background noise) going another. We will continue to
debate the rights and wrongs of last look, and of speed and of certain
execution strategies in this noisy segment but the smart providers are already
ensuring their focus is on where the real value both to the global economy and
their own bottom line lies – the hedgers.
The speed merchants can complain all they like about not
gaining access to the hedgers’ business first hand but they need to understand
two realities. Firstly, a hedger does not want to trade on an exchange and have
the trade cleared – they want discrete execution and delivery.
Secondly, the hedger wants certainty of execution and
someone willing to accept a transfer of what can be significant risk – they
certainly don’t want to see a market running away from them because a so-called
LP is churning and burning the risk.
When a firm can ally the ability to risk warehouse with
speed they have a powerful proposition because they will straddle the two
worlds that I see developing.
For those that can’t I suspect they will continue to quibble
and make most of the noise and attract most of the attention. The reality is,
however, I don’t think many people really care.