So back in November I wrote about how humans would struggle to be the first to react to news in the future. It appears I may be wrong if the lawmakers have anything to do with it.
Recently, the latest in the saga occurred when New York Attorney General Schneiderman said the low latency advantage US exchanges and trading venues are giving high frequency traders an advantage by allowing them to use the latest technology to access markets faster. And his investigations into HFT are hence wider.
Story Points To One Conclusion
While that article appears to have nothing to do with FX at face value, it’s an extension of the probe into early release of data like Michigans and Warren Buffett’s Business Wire ceasing to give high speed access to press releases. If you follow the story to its theoretical conclusion, it’ll lead to ceasing the low latency delivery of economic data and news – and to an investigation of news & sentiment analytics technology. Not to mention forex being solely traded on-exchange and centrally cleared. And there we are, we have reached the point where human traders are supposedly back controlling the game and the politicians will declare victory.
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The whole thing is like Formula 1 racing – where the richest teams hire the smartest people and get so good that the ‘regulators’ have to step in and put restrictions in place to keep it ‘exciting’.
While it’s not for me to say whether ultra low latency access to markets and information is ‘unfair’, and ignoring an argument that the ultra low latency arms race is already over; or that investment in the technology has made price discovery more efficient (like Formula 1 technology finding its way into our cars), it seems putting entire control back in the hands of the human is not the wisest play. Ergo the investigations into price fixing – LIBOR, Gold, Forex and Crude Oil (so far).
So, let’s say we restrict high frequency trading and make sure all the daily price fixings are fair and transparent… That’s a couple of battles won, but not the war. Why not? Because being the first to market information has always been a key tenet of trade – since the dawn of man. So whatever restrictions you put in place, the richest and smartest market participants will always find a way to get an edge. If they didn’t they’d get fired (or in past times, starve & die). And then there’ll be another market practice that someone takes umbrage with.
And so we’re back to the Formula 1 analogy. The richest and smartest teams find ways to use/bend/avoid the rules to make their car the fastest. If they don’t, they lose their fans, their sponsorship and ultimately, their jobs.
So who wins? Politicians – because they are transient. They don’t need to win wars, just battles.