Regulators wake up to sponsored access
It seems that my fear has spread to the US Securities and Exchange Commission.
At the start of October, I wrote about sponsored access and the danger I thought it posed (see Sponsored access and DMA: Predicting the next blow up). It seems that my fear has spread to the US Securities and Exchange Commission. In a speech to the Securities Industry and Financial Markets Association on October 27 in New York, SEC Chairman Mary Schapiro said: “As many of you know, we are already moving forward on our market structure initiative. As regulators, we at the SEC are mindful of the extraordinary technological advances and the benefits they have brought over the years.”
“A related issue, on which we also expect to seek public comment, involves co-location – the process where exchanges allow some broker-dealers to place their servers in close proximity to the matching engine of the exchange. This could result in significant advantages, at least for certain traders for whom speed is of the essence. In the interim, we are making sure that exchanges offer these co-location services on terms that are fair and non-discriminatory and that are transparent to the public. In addition, I have directed our staff to come up with actual market structure proposals as well. One proposal will address the risk of sponsored access to exchanges. It will focus on arrangements that enable unfiltered access by non-regulated entities – in many cases, high frequency traders – to exchange systems. I liken it to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied.”
I have yet to ascertain if any prime broker is providing sponsored access to any FX trading venue. But venues certainly offer co-location facilities in the quest for speed, so I would guess that it exists. When he announced the launch of YoursMineShag three years ago, Ron Smith-Galer made the following observation about latency: “While our IT infrastructure will ensure that we are one of the fastest, if not the fastest platform out there, we will operate a choke so that nobody is discriminated against on the basis of location. Transaction and data messaging speeds will be extremely fast, but more importantly they will be the same for everyone trading on the platform.”
Unfortunately, such a common-sense approach will never be adopted across the industry, especially when exchanges and trading venues market specific clients with co-location services – some of which they may well own.
As one global full commission merchant said at a conference recently: “The exchanges and some of the liquidity providers have marketed that type of access directly to our clients and some of our clients feel that to be competitive they need that kind of access. It used to be that the type of client that wanted that type of access was a small market-making operation and we would generally say no or make sure they were housed within our premises. But now it’s not just small market making firms; it’s large hedge funds, large pension funds, it’s generally almost everyone out there that feels they need to have low latency access to the exchanges. If we could get rid of it, I think we would.”