Journalist-story-teller Michael Lewis ignited a frenzy of debate and acrimony over high frequency trading with the release of his book, Flash Boys. We adore his writing, and his singular ability to shine a spotlight on esoteric fields. His book has made the arcane, complex, and sophisticated field of ‘high-frequency’ trading dinner table talk across America. While the level of discourse has ranged widely, from technical critiques of market microstructure, to downright theatrical showdowns on the cable news networks, we believe in the power of transparency.
For those of us in the financial services or investment management fields, there was arguably not much ‘new news’ in Lewis’ Flash Boys – the financial incentives to find and exploit latency (or any type of) arbitrage in public markets have always been and will always be considerable. In the best of worlds this is a good thing, ruthless competition to exploit inefficiencies should minimize those same inefficiencies with all market participants benefiting from faster, cheaper order execution. The problem arises when, through regulatory oversight or incompetence, we allow conflicts of interest to form within our capital markets such that inefficiencies are not minimized through competition, but are allowed to balloon in a self-reinforcing manner.
One might argue that Flash Boys came late to the HFT party, and market forces had already begun to deflate the balloon of profits that could be made (at least in US markets) from latency arbitrage. And yet, anyone who would dismiss the signs that the ‘investing public’ is becoming an increasingly well-educated, technologically savvy, and demanding customer base with a passionate interest in the fairness of their financial markets is not paying attention.
At Quantopian, we believe that broader interest in capital markets will lead to more educated investors, and that market forces will continually drive creative solutions to anomalies such as latency trading. Therefore, we are extremely pleased to be able to deliver new functionality to our customers whereby orders placed with Quantopian algorithms can be routed to the IEX trading venue for execution. IEX is a stock trading platform launched late last year with the express goal of negating latency arbitrage by introducing a delay of 350 microseconds in the execution of trades. If you aren’t already managing your algorithmic trading with Quantopian you can test out a basic investment strategy for free*, or to learn how to route the trades from your existing account to IEX check out a sample order.
We fully expect the conversation on fairness and transparency in the US stock market to continue to evolve, both at the regulatory level and in the court of public opinion. From our vantage point the inexplicable lack of automation and algorithms in the investment process is an even bigger target for reform than market microstructure. While trading has become essentially automated (albeit with bumps along the way), asset allocation and portfolio management remain stubbornly manual and by extension artificially expensive. The premium investors today are paying for even the most formulaic portfolio management services can be on the order of 1-2% per year, a rate which frankly dwarfs the per-investor costs of something like latency arbitrage. At Quantopian our mission is to continue to put the power in the hands of investors to help them drive down costs while getting superior performance from their ideas and we think that mission is well served by routing trades to IEX and doing our part to promote increased transparency and fairness in our capital markets.
- Join Quantopian’s live trading pilot without writing any code
- Learn how to route orders to IEX
- Themis Trading’s blog
- Overview of the Maker Taker rebate model
- Our review of “Wall Street Code” documentary
*Live trade with Quantopian by May 19th and we’ll give you two years of free access for accounts up to $100,000.