Sep

11

Optimal location has always commanded a premium in commerce. If you wish to set up an HFT franchise, it is no different than what McDonald's does in setting up a burger store, or what futures exchange members used to pay in order to stand in the pit and spit on one another. The stock exchanges have set up an electronic pit — populated with server racks with colorful CAT5 cables instead of garish and worn neckties and jackets — each with a cable to the main router which is cut to exactly the same physical distance as all the other servers in that pit. You gotta pay to play. It is as it has ever been. The benefits in market liquidity to have these efficient competitors duking it out to be JUST on the inside of the bid-ask spread has the effect of narrowing that spread, reducing the transaction costs, and ability to execute orders without budging the quote, and for this efficiency they are being well rewarded. I reckon it is to the Good. There will be abuses and corruptions, as ever, but these are part and parcel of the mistress's price.


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