[elecengin]

This article brings up something that HF traders have been bemoaning for a long time: the fragmented US market structure. In US equities, you need to monitor almost a dozen exchanges to be competitive. The popular book "Flash Boys" gave the impression that HF traders loved this market structure and used it to extract more money out of the market. In the majority of cases, this is wrong.

In fact, the fragmented market results in huge costs (4 datacenters worth of infrastructure, low latency connectivity, etc) In reality, most market makers would vastly prefer to simplify this away. This is one of the reasons many traders have moved to alternative markets that have fewer trading venues (for example, many futures and options trade primarily on a single venue)

[bko]

Bare in mind that the system used to be centralized and, as mentioned in the article, was much costlier [0]. The fragmentation has downsides and no one likes redundancies, but it is a direct response to the older, less competitive system. The fact that a decentralized system is better is exhibited in the lower price and the participation in the smaller exchanges.

[0] http://www.bloombergview.com/articles/2014-03-31/michael-lew...

[elecengin]

Completely agree - in the single exchange markets you see a lot of monopolistic behavior with the operators.

In this current, though, we have three major operators with 2-3 exchanges each - many with single digit percentages of market share. I suspect that the savings in execution cost due to competition are vastly overwhelmed by the increased cost of infrastructure for most market participants (excluding the largest firms).

[kevin_thibedeau]

The HFT guys love the fragmentation. If not they wouldn't be building out private microwave links between Chicago and NY to "beat the market".

[minimax]

The NY/Chicago arb trade is futures vs equities. In other words it's two separate products with highly correlated prices. On one side are the futures contracts and on the other side are the underlying stocks (and ETFs). As long as the two separate products exist, you'll always have fast arbitrageurs. This is true whether the matching engines are 1000 miles apart or in the same rack.

[harmegido]

That makes no sense. Here let me rephrase it:

"Americans love commuting. If not, they wouldn't be spending millions of hours in their cars each year to get to work!

[joosters]

I'm sure they'd rather not be paying for microwave links, but they have to because everyone else is doing it. End result: everyone wastes lots of money to get no additional benefit.

[CyberDildonics]

Fragmented exchanges are better for everyone except for high frequency traders. Then they actually have to do low latency arbitration to make money instead of full on front running like they do now.

Arbitration between physical locations is something that can't be helped. The other things ways that high frequency traders make money can be helped by better systems, but there are no incentives to make those systems when exchanges make so much of their money from high frequency traders themselves.

[elecengin]

> Fragmented exchanges are better for everyone except for high frequency traders. Then they actually have to do low latency arbitration to make money instead of full on front running like they do now.

This is a very strong statement with little support. I agree that some competition among exchange operators is important, but how do you justify exchanges like CHX, with approximately 1% market share?

I am not sure how to respond to your comment regarding front running without more detail. Many sources have already debunked the Michael-Lewis-style argument regarding front running. Where do you see front running? (Using the proper definition of trading ahead of a customer order based on knowledge of that order)

[CyberDildonics]

> how do you justify exchanges like CHX, with approximately 1% market share?

What needs to be justified? It is competition and decentralization.

[Rimpinths]

Some HFT strategies depend on fragmented exchanges. Look up "latency arbitrage" for examples.

[CyberDildonics]

Yes that is one way they make money but not the only way and not even the most effective way since they are splitting their profits with anyone that can compete with them and there is only so much to be made.

The fact that there are multiple issues with high frequency trading is one of the reasons it ends up being so polarizing. It ends up being an ambiguous term that sometimes means something that is a natural result of decentralization, and sometime means techniques that would be grating to most people's common sense of what should be legal.