Jeffrey Carter of Pointsandfigures has a post out today breaking down the WSJ reporting of the lag between confirmation reporting. His main argument is that these millisecond delays in the confirmation to the trader versus to the public create an advantage. In simple terms the trader knows about their fills before the market does.
He goes on to explain that information gleaned is exactly what all of the pit traders and CME members were fighting about with the introduction of the E-mini. He uses this as an explanation for why the price of membership has gone down.
Here are three things that have the same or greater influence on the price:
- The CME changed the rules on the number of seats required to have an arb/filling operation. If you were a pit trader and wanted to get out on the screen either as an arb opportunity or for better prices (pit traded contracts (BIGS) trades in .10 increments and E-mini in .25) it required both the Pit trader and the electronic trader to have a seat. Today only one seat is required.
- Tightening of collateral. Here is what is available for collateral. Lets say you had 25k in your account and you owned your seat. You could use the 25k plus a portion of your seat. Today that has mostly gone away. I am not sure if that directive was from CME or from brokers.
- Costs have dramatically been reduced. For a self directed trader you could expect to pay $10+ a round turn. Today you can easily find a rate below $5 or if you do not want to have direct access to broker (not recommended) you can find rates under $4.
You can also add retirement of traders into the mix. There is supply and demand in effect. We will have to agree to disagree that the value of information from the pit is reflective in the seat price. Squawk boxes have been around for a very long time as well. It probably has more to do with the edge for everyday traders.
Mr. Carter also points out that the fact the CME charges for co-location services means it is an advantage. There are several brokers where you can get co-location services from. I didn’t make calls but as of 2008 you could rent a VPN for for $299 a month. I am not sure how prices have changed. The other explanation is that CME is a public company and they are trying to defray some of the costs associated with upgraded infrastructure.
Mr. Carter says:
There are plenty of people I know that are risking millions of their own dollars to trade each and every day. They are holding positions, taking risk, and trading. They always knew they were risking more than the average person in the market, but now they know they need to redefine how much they risk since they are at a competitive disadvantage.
If you have that much invested the 10k-15k a month it costs for co-location space (in 2008) seems to be worth it. But not so much for the little guy, but even that keeps getting less expensive. If you want to argue one of the good things that HFT has provided is a road way. Would we have had railways to the West without the gold rush?
Futures markets are different in that, lets strip out dollars first, one person pays for liquidity and another is paid for liquidity. Said another way, not every position is established just to profit. A portion of all positions are to lock in the future price today for something that will be consumed in the future. Liquidity is more important than price.
The speed at which information flows has always been a matter of the individuals computer, proximity, and individuals reaction. Do I think that having your fills reported to you before the market is a huge issue? I do not think so. But that does not mean I do not want to get it fixed. Nothing scarier than not knowing your position so I understand their plight. But that has more to do with your software/technology than the CME.
I understand Mr. Carter’s point of view and the desire to be vindicated after all of these years. But lets focus on the liquidity issues not the reporting ones that few have an advantage of for milliseconds. For the most part we all have equal access to execution or it is in our control to improve them. Central marketplace FTW.
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