What If Speed Traders Competed on Price?

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Bloomberg Businessweek                          By Matthew Philips – June 4, 2012

In high-frequency trading, speed means everything. With most firms using sophisticated trading algorithms to scour the stock market for tiny price differentials, the trick isn’t so much spotting the profit opportunity, but getting there first. Which is why HFT firms put so much effort (and money) to upgrading their computers while paying steep fees to locate their servers next to those of the exchanges. There’s even a rush to spend millions improving the world’s fiber-optic cables so HFTs can shave a few milliseconds off execution times—reducing “latency,” in industry parlance.

Some see this arms race in speed as a waste of time, money, and talent. If everyone’s continually getting faster, the relative speeds stay the same, but costs continue to rise. One former high-frequency trader has a proposal to slow things down. Chris Stucchio, a math PhD who spent a few years working at a New Jersey high-frequency trading firm, argues that if stocks were allowed to be priced in increments below one penny, HFT firms would have to compete not just on speed, but on price as well.

The Securities and Exchange Commission requires stocks to be priced in 1¢ increments, a rule that reduces the ability of trading firms to compete on price. As Stucchio sees it, if stocks could be priced in sub-penny increments—say, half a cent—then HFT firms would be forced to compete on two fronts, not just one. In theory, firms that offer better prices would be rewarded, not just the ones claiming the trade a micro-second faster than everyone else.

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