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Comment for Proposed Rule 75 FR 33198

  • From: Addison D Tsai
    Organization(s):

    Comment No: 23200
    Date: 6/12/2010

    Comment Text:

    From:
    Sent:
    To:
    Subject:
    DearMr. Secretary,
    Addison Tsai
    Saturday,June 12,20103:21 PM
    colocation
    Co-Iocation/ProximityHosting Services
    10-006
    COMMENT
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    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
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