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This week, the S.E.C. announced that it had contracted Tradeworx, a high frequency trading (HFT) firm, to build it software that would allow the regulator to track stock market data in real time. In short: They want to be armed with the same weapons as sophisticated HFT firms.According the the New York Times, the $2.5 million program will be called Midas, and should be operational by the end of this year.
From the NYT:
With the Tradeworx program, the agency will gain access to every bid to buy stocks and every offer to sell shares on each of the nation’s 13 public exchanges. The system, akin to an X-ray machine for the stock market, could enable regulators to detect whether trading firms are overwhelming the market’s plumbing when they rapidly submit and cancel orders…
Above everything else, the S.E.C. want to analyse trading data quickly. That might help the regulator avoid another incident like the 2010 flash crash, when it took around 6 months to analyse what was going on in the market and pinpoint the source of the problem.
So a HFT firm is helping the SEC design a program that should catch out-of-control HFT firms or algorithms — sounds good right?
Not quite. Business Insider spoke to an Eric Hunsader, an executive at Nanex, a Chicago area based market data firm that does exactly what the SEC is looking to do — analyse information in real time.
In fact, Nanex, founded in 2000, has been doing exactly what Midas aims to do since 2004, and Hunsader has been programming since the 1980s. But his firm isn’t alone in these capabilities, he says.
“Take Active financial — they probably could deliver, within a day, at least the basic feed with equities… no analysis… Nirvana Systems or my old employer CQG or Bloomberg could do this. They have an army of programmers.”
Those companies could have their systems installed so quickly, in part, because they aren’t starting from scratch as the S.E.C is doing. As an example, let’s look at one program the S.E.C. will need—ticker plants. Ticker plants take in different exchange feeds, put those feeds on a disc and then stream them out to people who want to look at them.
It took Hunsader an estimated 25,000 hours of work to develop his ticker plant.
Another thing to consider: Midas will only be able to process data from stocks, but Hunsader says that will leave a huge part of the market untouched. Options make up about 80% of the data Nanex processes and futures, he said, make up an additional, complicated 5%.
“And I haven’t even started on the analyses tools,” Hunsader added. “You have to have an interpretation part. Assuming you’ve done the feed part right where you can process it quickly, then you need to know what to look for.”
In short, you need analysis. You need to be able to compare stocks at different exchanges in real time. And that’s hard because you have mountains of information coming in from different places all at once.
The kicker in all of this is the price. Midas will cost taxpayers $2.5 million to build, and for the same service, Nanex charges less than $1,000 a month.
And then there’s all the hardware…
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