Maybe I misunderstood, but it seems like they're saying that's not the case:

FTA: "First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out)."

They get their data from NYSE from apparently an aggregate feed, which was unintentionally delayed by NYSE. In my opinion, they should have been getting the direct feed and doing all consolidation themselves.

However, HFT firms will still have a vested interest in making more efficient aggregate feeds than the consolidators/exchanges.

Be that as it may in reality, per below quote I assume that behavior is still illegal.

"A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules (Reg. NMS) essentially become meaningless."

Please tell, how the world is supposed to provide that for free to anyone who wants it?

Colocated servers are the public.

The consolidated feeds are necessarily slower than the direct feeds, due to processing delays, unless the exchanges intentionally slow down their direct feeds. There are several companies that will sell you expensive FPGA or IBM Cell-based cards that will locally create a consolidated feed from all of the direct feeds. These cards aren't cheap, but are necessary for trading latency arbitrage strategies, and are also useful for low-latency market making.

Of course the consolidated feed requires a slight processing delay, so unless they intentionally slow down the direct feed, quotes from NYSE will appear first in the direct feed and very slightly later in the SIP feed. The argument here is about if the delay between SIP and the direct feed is small enough to be permissible.

The "public" being talked about is the paying public. Nothing in the regulation requires a free SIP feed, and I assure you NYSE doesn't provide a free real-time SIP feed. The regulation is to prevent selling an intentionally slow connection to everyone, and giving a faster feed to only their top tier customers.

Disclaimer: I'm not a lawyer.

Pretty simple.

The exchanges take in $500M a year in SIP fees, which are supposed to go to the most efficient hardware and software available. Pretty sure that's not happening.

Oversimplification, forgetting the laws of geometry and physics.

The triangle inequality and relativity conspire against the SIP. If you're getting the SIP from B, any new prices at C go to B and then forwarded to you, so it's faster (best case equal in the degenerate triangle case) to get direct feeds from B and C and consolidate locally.

I was just pointing out that

> If a private company can consolidate faster than the SIP, then the SIP isn't using the most efficient hardware and software available now is it?

is faulty reasoning.

But the law's the law. "It doesn't make sense" isn't a valid defense.

Usually due to capex: energy infrastructure, network effect: financial, or limited availability of resources: wireless spectrum.

If it's in the public interest to have trucks and no firewood seller would otherwise provide them. That's absolutely something government can (and IMHO should) mandate in exchange for a firewood license.

The retail investor gets the slowed down price (the NBBO is really what the internalizer/wholesaler saw from the SIP when they executed your order). That same internalizer buys/sells from the faster feed. Whenever the two feeds are out of sync, it's like printing money.

"The price for getting a direct line is not unreasonable?" I just laughed out loud reading that. Is $60,000/month for just one exchange (there are a dozen), reasonable? Then you need network engineers, infrastructure, etc. It used to be nowhere near this expensive for "real-time" data. Orders of magnitude less.

How much latency would be acceptable for a fully consistent, high throughput distributed log of events, that when it becomes unavailable the entirety of US trading shuts down and if it ever gets out of order can cause gigantic lawsuits?

How would you change the obvious organizational disincentives as well? Given that maintenance of the SIP is full cost, no profit operation for the exchanges?

Finally, don't take this as a criticism of your whistle blowing, I think that is critical to a functioning market, I am curious to know how you would solve the obvious technical challenges the consolidated feed faces?

I'd still love to hear you discuss it...

Similarly, people complain about the SIP feeds being latent and I'm sure it would be a very real problem if any single exchange being unavailable made the entirety of the SIP unavailable.

Its a fascinating problem because the engineering trade-offs are relatively static and well known, but each and every decision you could make provides an opportunity for arbitrage market activity that someone would consider predatory.

That we've layered a regulatory requirement that is pretty vague on some of the edge cases on top of this, just adds to it.

The Regulations (Reg NMS) are very clear about this. That's why I was awarded $750K from the government after all.

If you are asking about evidence that some people have claimed that the SIP being non-consistent is a problem for audit and regulatory compliance, is that not what you yourself are arguing in this post? http://www.nanex.net/Research/IsNBBOIgnored.html

I think maybe you are reading into my comment something that isn't there?

Some people think this is not the case?

Edit: wow, rate limited after three posts this morning. A new HN low.

My response to tptacek below:

My dumb order?

How can HFT's intercept and redirect my trades to their, appently, captive pool of dumb trades?

Sure sounds like multiple markets are operating...and you are even telling me that my orders will be scraped before they can even reach some markets.

>is that HFT market makers will give you a price break to route your dumb order to them

You claim a price break on a private exchange. How can they (HFT market makers) deliver a better price than the public exchange? Presumably they cannot have bought it on the public market at the better price, so some party must absorb the loss on the price break.

My question can now be translated to:

Who absorbs the loss from the price break?

As a small trader, you get access to special lower prices that a hedge fund can't get. Your broker will be routing your order to a wholesaler who will fill it at lower prices (ie, narrower spreads) than you would get on the open market, because they have a legal obligation to not screw you over.

You can request that they route it to anywhere you want, and they are legally obligated to do it if you ask, but you really don't want to do that. Unless you like giving money away of course.

(Also, you don't seem to understand basic market mechanics. You use words like "scraped" or "picked up" which are nonsensical in context.)

IEX recently suggested that retail investors should request their broker to route their orders to IEX, for which they got criticised very harshly. And rightly so.

I used the word scrape in response to tptacek's response below my above post. If a trader is not aware that what tptacek describes is happening to their orders, then I believe my characterization is accurate.

As a small investor, your order is probably routed to a wholesaler like Citadel, where you will get a better price than you would otherwise get.

And you are upset because you incorrectly believed that your order would be routed somewhere else (where, exactly?), where you would get a worse price, which you think would be better because...why?

> I believe my characterization is accurate.

It's not even slightly accurate; it's literally the opposite of the truth.

Would you trust Wall Street to give you the best price on anything if there was no way to verify it?

There is no way to reasonably know if you are getting the best price (because they can change many times in the same second).

You are relying on the internalizer to give you the best of many possible prices. History says: "that's not going to happen"

Full disclosure, I have in fact worked with your data and at an HFT in the past but have moved out of the industry, if you were going to ask.

1) A dark pool. This is just another name for an exchange, but one that is not public. I don't know if NYSE runs one, but it wouldn't be surprising. The theory behind these is that they are provided as a service to large institutional investors to trade with each others outside the vagaries of the public markets for lots of reasons (mostly advertised as a way to not impact prices). The reality of these has been mixed at best. You have to opt into using a dark pool.

2) Payment for order flow. In this case your broker (not the exchange) has an agreement with a third party to sell your trades to them so that they can either trade with you directly or route the trade to an exchange. The reason they want to do this is that the aggregate of all the trades they are buying is not price opinionated (as opposed to hedge funds say) so the market maker can make the aggregate difference between all of them. This mechanism is largely how all discount brokers offer cheap or free trading, so it is likely a huge boon to you. A couple of things to note about this, your broker has to disclose it to you, I believe you are still required to get the NBBO price, & I believe you are required to be able to opt out by directing your order to be directly routed.

[edit] To clarify your question `jsprogrammer `tptacek is referencing #2 above. The reason the technical oddities & violations at NYSE don't have a huge impact on a retail investor is that unless otherwise stated, they are interacting with a wholesale market maker before their order hits any exchange, in a deal worked out with your broker and governed by legal obligations on both their parts.

A U.S. equities exchange has to be registered with and approved by the SEC. There are currently 12 of them. As a registered exchange you have to play by certain rules, and in exchange your displayed top of of book is subject to the order protection rule, meaning that no other venues (exchanges, dark pools, ECNs, or broker dealers) are allowed to trade through your top of book quote without first routing an order to you for the full amount of the displayed size. Exchanges also get a share of SIP revenue (which is important to exchange economics).

In it's most technical definition, a dark pool is an ATS (specifically not an exchange) that has no displayed quote i.e. no market data whatsoever. Most ATSs in the US fit this definition, though there are also ATSs that display a quote. For example, IEX is an ATS that has feed for their top of book quote... so technically not a "dark" pool.

NYSE doesn't run a dark pool and it would be weird if they did. Most US equity exchanges support fully hidden (completely non-displayed) orders, so if you want to trade in the "dark" on NYSE you can just send a hidden order. I think this is one area where futures exchanges and equity exchanges differ. In futures you have icebergs but not fully hidden.

2)

Wholesalers aren't allowed to give you a worse fill than the NBBO. That's the law. Often they will actually give you a tiny bit better than the NBBO on marketable orders. I think they do this so retail brokers can advertise price improvement. For most of the low cost retail platforms there is no ability to direct your order. You give it to the broker and I think basically if it's a marketable order they send it to the wholesaler and if not they post it to an exchange that offers a liquidity adding rebate (the brokerage keeps the rebate, natch). If you are willing to spend a little more on your brokerage account, you can use a platform like Interactive Brokers which does let you route orders directly.

Thanks for the clarification on the NBBO ramifications on wholesalers. I have never worked on a order flow trade and would love to see an insider account of them (its sort of what I was hoping Flash Boys would be about).

This is the case for retail orders, but not for trading firms. Prop trading firms don't tend to route their orders through wholesalers; they have deals with execution platforms (or implement their own) and route their orders to exchanges.

But there's a whole 'nother set of reasons why we're not especially concerned about competitions between prop trading firms on speed/latency/whatever: if they're impacted by HFT at all, they're competing in a zero-sum game to arb prices, and there's no moral reason why a slower trading firm is entitled to some equitable share of all the available profit from some arbitrage strategy.