High-speed data feeds are essential components for delivering price quotes, yields, and other pertinent financial data without delay. They play a pivotal role in high-frequency trading (HFT) by providing real-time data analysis.
These feeds can be transmitted through fiber optic cables, microwave frequency broadcasts, or by co-location at exchange server sites. Since HFT profitability depends deeply on low latency, financial firms have collectively invested heavily in constructing and upgrading high-speed data feeds.
Key Insights
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High-speed data feeds provide ultra-low latency data connectivity that is crucial for real-time information and execution in HFT and algorithmic trading.
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High-frequency traders heavily invest in the fastest networks and data feeds to maintain a competitive trading edge.
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Latency is primarily determined by the distance the data signal travels, usually through fiber-optic cables.
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An HFT firm with servers co-located within an exchange benefits from significantly lower latency than competitors located even just a few miles away.
How a High-Speed Data Feed Works
High-speed data feeds offer algorithmic traders more rapid and reliable data. In the realm of HFT, where success hinges on data speed, there’s a relentless race toward achieving near-light-speed transmission. With these advancements, financial markets exhibit natural monopolies in data access, which critics argue give HFT firms an untoward edge over institutional and retail investors.
Proponents, however, contend that HFT enhances market liquidity, improves security pricing efficiencies, and reduces trading spreads and costs for all participants. The implementation of designated market makers by the New York Stock Exchange (NYSE) since 2008 is a step toward maintaining fair and orderly trading. The incorporation of HFT has facilitated improved price discovery and liquidity provision for various market participants.
Despite these advancements, certain HFT tactics remain contentious. Front running is one such predatory practice where traders detect incoming orders and pre-emptively execute their trades, often resulting in reduced returns for institutional investors. HFT has reshaped the investigative dynamics prominently seen by traders noticing order pattern manipulation in the early 2000s, often at their expense.
Illustrative high-speed data feeds include solutions such as Bloomberg’s B-PIPE data feed, Thomson Reuters’ Matching Binary Multicast Feed, and EBS Brokertec’s Ultra—all designed to offer market data with exceedingly low latency.
Special Considerations
Today’s stock market operates as a vast and intricate network of interconnected automated trading systems. HFT, with its hallmark high speeds, minimal holding periods, and impressive order-to-trade ratios, commands around 50% of U.S. equity trading volume. Regulatory adjustments and smaller trading volumes have lately decreased its once-dominant 60% share from 2009. Consolidation in the industry continues as rising compliance costs also contribute to narrowing HFT margins.
Regulators are also addressing the competitive advantages of HFT dominations. Various measures such as introducing speed bumps to add randomized time delays help to level the playing field. For example, the IEX exchange’s alternative trading system, which introduces a 350-microsecond delay to neutralize HFT advantages, inspired the NYSE to implement similar mechanisms in 2017 targeting small and mid-cap company shares.
References
- U.S. Securities and Exchange Commission. “How the NYSE Market Model Works”, Page 1.
- The Atlas. “High Frequency Trading Share of U.S. Equity Average Daily Trading Volume”.
- Nasdaq. “High Frequency Trading (HFT)”.
- U.S. Securities and Exchange Commission. “Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E to Provide for a Delay Mechanism”, Pages 1-2.
