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beating high frequency trading


IEX’s solution for keeping HFTs at bay is remarkably elegant. It doesn’t ban them. It merely slows them down a tiny bit.


Most exchanges allow broker-dealers and HFTs to house their servers right next to the exchange’s own servers that carry out the trades. The result is an almost instantaneous transmission of information about what trades are executing. That gives HFTs a momentary advantage that they combine with raw processing power to get an edge over other players.


IEX has space for broker-dealers and HFTs to store their servers too. But not next to the trading servers; farther away, in another building. This adds a crucial delay. It takes orders 350 microseconds to travel from one building to the other, 250 microseconds to execute, and another 350 microseconds to send back confirmation. All told, that’s 950 microseconds, or just under one millisecond. IEX thinks it’s enough to stop HFTs from peppering the exchange with orders that can help it predict investor behavior.


IEX also eliminated all but four of the hundreds of order types exchanges offer brokers.


“We’re trying to put the greatest number of people on equal footing,” says Katsuyama. “There’s a huge swath of participants that these [950] microseconds is meaningless to but it has huge meaning to a very small group [the HFTs],” he adds. The point is not to prevent HFTs from doing a lot of the things they normally do—such as trading on small differences between a gold exchange-traded fund and gold futures, for example. It’s just to stop the predatory strategies that make them money at the expense of real investors.

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