Comment Text:
From:
Sent:
To:
Subject:
DearMr. Secretary,
Addison Tsai
Saturday,June 12,20103:21 PM
colocation
Co-Iocation/ProximityHosting Services
10-006
COMMENT
CL-OOOOl
I would like to submita commentregardingCo-locationand Proximity
Hosting Services.
I am a privatecitizen, who currentlyis not engaged in the futures
markets,butwould like to participatein the future. I have a PhD in
Economics from DC Berkeley and I have workedin the financial services
field before developing
high frequency algorithms.
The main economic benefitthatI see for using co-location is to
utilize the informationof price changes coming directlyfrom the
exchanges. I believe a majorpartof this benefit is to justchange
and price of an orderwheneverthe marketprice changes.
Let me give you an example, if you wantedto buy a security, it would
be far cheaperto buy at the bid price thanpayingthe bid-askspread.
However, as soon as the bid price changes, you would need to adjust
yourprice if you wantto maintainyourprobabilityof execution and
not over pay. The same example holds if you would like to sell a
security, it would be far betterto sell at the ask price.
As the marketfluctuatescontinuously,one would need to adjusttheir
bid and ask continuously. The only people who can do this effectively
are those who are co-locatednext to the exchanges.
We can learn somethinghoweverfrom the technologies utilized in the
tradingof otherasset classes.
Because thereis far more
competitionin the equity andfx arena,there are advancedordertypes
which allow one to gain most of the advantagesof co-location. If
the futuresexchanges were to allow Pegged Ordersalong with Icebergs
Orders,then the majorityof advantagesfrom utilizing co-location
would be substantiallyreduced. Pegged Ordersallow an orderto move
along with the marketand adjustautomaticallywith the market. An
ordercan be pegged to the Bid, or Ask, or Mid, allowing efficient
executionwithoutresendingthousandsof cancel ordersevery time the
price changes. IcebergsOrdersallow participantsto submitan order
withoutrevealingthe full amountintendedto buy or sell. Large
displayedorderscan sometimes cause a panic in public marketsbecause
the sizes are greaterthannormalvolumes. By requiringexchanges to
support advancedordertypes, such as Pegged - IcebergOrders,this
can allow someone with sufficientpatienceto execute ordersin the
marketdiscreetlywhile saving substantiallyby not payingthe bid-ask
spread.
As it standsnow, when the exchanges do not offer advancedorder
types, the majorityof ordersthey receive get cancelled and unfilled.
These ordersget cancelledbecause the marketprice changes and
fluctuates. The situationguaranteesa virtualarmsrace in
technology as the speed of marketdataincreases. People will seek
out co-locationto reactfasterto marketdata, and the exchangeshave
to spend moremoney on technology infrastructureto acknowledgeincoming orders, which in all likelihood be canceled. This huge
volume of orders provides no economic benefit since the majority are
canceled. However, if people are allowed to submit Pegged orders,
then only one order needs to be submitted and acknowledged. By
allowing Pegs and Icebergs, a virtuous cycle for the exchanges can be
created, benefitting everyone. Pegs and Icebergs will allow more
people to act as virtual market makers without necessitating the best
co-location and computer equipment. As the bid-ask spreads tighten
from market maker competition, more people will come into to do market
orders who desire the immediacy vs the cost of crossing the bid-ask
spread. More sustained volume will support more market makers and the
spreads will tighten again leading to more volume. Eventually it will
come to some sort of equilibrium.
I appreciate your considerations regarding these comments.
best regards,
A.D. Tsai
10-006
COMMENT
CL-OOOOl