Many technologically advanced firms compete on their understanding of market microstructure, and the tools are in place for firms of all sizes to query live and historical data as market events are unfolding. To better compete with high-frequency trading firms, many buy-side firms are adopting some of the same sophisticated technology that the HFT firms use.
The past couple of years have seen increasingly creative approaches to managing the speed and complexity of the markets. IEX, poised to become an exchange next month, may be the highest-profile new approach, with its “speed bump” coil of fiber-optic cable for slowing down access to its market by 350 microseconds.
But several investment firms have been just as progressive in their adoption of new tools and technologies for competing in highly complex, fast-moving markets. T. Rowe Price Group reportedly has begun testing a new service from high-frequency market maker Virtu Financial, through which Virtu will use the speed of its systems to execute trades on an agency basis for clients.
Earlier this month, Bloomberg reported that hedge fund Renaissance Technologies has filed a patent for a system that uses atomic clocks to precisely synchronize trades across multiple exchanges. According to the Renaissance Technologies patent application, published by the U.S. Patent and Trademark Office in February, a trading server at the firm divides large trade orders into multiple smaller orders and attaches a transaction execution time to each smaller order. The smaller orders are disseminated to co-located servers at multiple exchanges, enabling portions of the large order to be executed simultaneously at different exchanges when the precise execution time is reached.
Trading by high-frequency trading firms accounted for roughly half of the volume in U.S. stocks last year, according to TABB Group. The recent initiatives by Renaissance Technologies, T. Rowe Price and others signal how buy-side firms are adapting to better compete with HFT firms by adopting some of the same sophisticated technology that the HFT firms use.
Advanced technologies for competing in fast-moving markets, such as the precision time-stamping used by Renaissance Technologies, are no longer only available to large investment firms with a wealth of resources. Increasingly, sub-microsecond precision is becoming available for the rest of the market as well. The government’s Global Positioning System (GPS), for example, widely used commercially for its global location tools, is a key source for accurate time stamping. Each GPS satellite contains multiple atomic clocks, whose signals are decoded by GPS receivers to determine time to within 100 billionths of a second. In finance, GPS technology allows firms to obtain precise time measures without the cost of independently operating atomic clocks.
What’s more, time stamping is not only for calibrating execution. The pairing of precision time stamping with market data analytics is yielding a new level of transparency into complex markets. Regardless of whether market participants were for or against IEX’s application to become a full-fledged stock exchange, the hundreds of letters received by the Securities Exchange Commission on both sides of the issue demonstrated that a wide swath of the market views microseconds of time as a differentiator. That being the case, firms trying to measure transaction cost need the ability to see and analyze the market in real time.
We believe in order to understand how to react to data that various exchanges provide, market participants have to understand how that data is collected. Many technologically advanced firms compete on their understanding of market microstructure. With the massive amounts of live and historical data generated by markets, not only HFT firms, but the buy-side and all market participants need the ability to view and synthesize data in real time.
Analytic tools now exist to enable firms to take a “Google Earth” view of financial data. Imagine a 30,000-foot-view of the overall market that firms can drill down into to analyze the equivalent of a grain of sand on a beach, when needed. This is not only possible, but essential as expanding regulatory burdens and increasing market fragmentation make it necessary to manage broad and fine views of the market to gain insight to stay ahead of regulation and complexity.
The tools are in place for firms of all sizes to query live and historical data as market events are unfolding. To compete in complex markets, firms need to harness these tools to track their own perspectives on market microstructure in real time.
For HFT firms, this means that they will have to continually evolve to retain value.
For sell-side firms, this enables them to offer clients meaningful information and a competitive advantage as commoditization between vendors increases.
For buy-side firms, the intersection of big data, precision time-stamping and real-time data analysis means they can apply their own proprietary views on the market to compete with high-speed firms in fast-moving markets on a similar playing field.