December 13, 2010
This comment is in regards to the above concept release on equity market structure. Specifically it refers to the section on Co-Location and its effect on the long term retail investor. However, I have always been uncomfortable with the distinction between long and short term investors, except at the extremes of short term trading. I would most often categorize myself as a long term investor, but in the past certain company specific shifts have caused me to reevaluate trades which I had initially intended to be long term. For instance, a retail investor might purchase a stock because of its high yield and hope to hold the company for several years in order to capture this income stream. However, if one month later the company cuts its dividend the fundamental purpose of the trade has been eliminated. The investor may choose to liquidate this position in favor of what is now a higher yielding opportunity. Although the trader intended to be a long term investor at the time of the trade, ultimately its time frame was dramatically shortened. The implication here is that in many cases the intended trading time frame is not identical to the time frame in practice. Another implication is that at the initial time of the purchase the investor's time horizon was not yet determined and therefore the distinction is unnecessary at the time of the initial purchase.
With this in mind, the retail investor should largely be unaffected by the impacts of co-location. The retail investor's focus need not be on the sub-second intervals between when the trade is placed and executed. Rather, the traders primary concern should revolve around the fundamental reason for the trade in the first place. It is possible to make the argument that by supplying liquidity, traders with access to the high speeds provided by co-location are actually helping the retail investor achieve his goals. This argument applies to many HFTs, however it does not apply to such practices which devour liquidity, such as front running.
Finally, the concept of whether or not it is fair that one investor may pay for the benefits of co-location while the retail investor cannot afford such a service does not take into consideration the difference in the two trader's goals. The retail investor seeks to make a purchase as cheaply and easily as possible, and therefore does not wish to be burdened by the high costs and industry knowledge required to effectively utilize co-location services.