Nerds on Wall Street: Math, Machines, and Wired Markets

3.7. So Many Markets, So Little Time

You can rent a parking space for your execution computer right next to the market center computers, eliminating communication latency. This service is now offered by the NYSE, NASDAQ, CME, London, Euronext, Tokyo Stock Exchange, Globex, and a growing list of other market centers.

This colocation can do wonders for latencies in execution. As the algo wars proceed, we will see tools that combine fast broad market access with access to proprietary execution channels. Brokers willing to commit capital will be able to offer zero latency executions. Zero is low enough for lots of fast trading strategies that are subject to the vagaries of execution. Watch out—here comes a mob of new hedge funds.

Algos at the edge see a thousand points of light, each with its own alternative trading system and its own clientele (brokers allowed or buy side only). In many of these systems, order size is hidden. Finding liquidity may require being in multiple systems for a period of time. This can create a risk of overexecuting unless very conservative rules are followed. Larger firms, willing to risk some capital by incurring the risk of overbuying (or overselling), will be able to allow their clients to make use of more aggressive trading tactics.

Multiple market fragments can be seen as providing a service to different classes of traders seeking liquidity, thus making markets overall more efficient, resilient, and robust—all good things. But in a complex, multiple-fragment ...