April 16, 2010
To Whom It May Concern,
As regards high-frequency trading, I believe it is wise for the SEC to examine electronic trading systems that may have deleterious effects on pricing for long-term investors in securities, and may unduly prejudice returns in favor of platforms specifically designed for speed. There is no rational market motive that supports firms with collocation reaping vastly higher rewards as compared with other firms.
The solution to this is simple – it is not a ban on collocation, which would simply push competition outside of the server room to the building next door. It is also not taxation, as no level of taxation short of truly confiscatory levels would make such arrangements purely unprofitable – merely more selective of trades.
The best solution is to require markets to trade in discrete time blocks, with allocations with limited supply of stock versus demand allocated pro rata in a waterfall of highest bids. For example, if a trade is submitted by Firm A and Firm B submits a trade 200 microseconds later, they should be allocated to the same two second/one second/half second/whatever-time-interval-is-decided-works-best block. Let’s say Firm A has bid 1mm shares of IBM and Firm B 2mm shares at the same price within 250 microseconds of Firm A. They then get grouped into the same “second”. Suppose then that only 2mm shares are being sold in that second. Then Firm A should get 1/3 of the 2mm shares, and Firm B should get 2/3 of the 2mm shares.
It’s a simple, elegant way to eliminate the problems of essentially paying off server farms for better access to the markets, which is inherently unfair, while recognizing an obvious truth (that an order submitted in the same second has the same degree of expediency for all real, practical purposes). It also gives the SEC a tool with which to control any deleterious effects of high-frequency trading, since once the trading window is established it would be a simple matter to switch it from one second to two seconds, if that were determined to be better policy.
Thank you for your time and consideration,