Subject: File No. SR-EDGX-2015-62
From: Kermit Kubitz

January 19, 2016

The issue with rule changes like these, increasing the fees for increased access to information about orders, depth, size, amount, and the like, is not their impact on "competiton between exchanges." but on competition between investors, specifically between retail investors and small portofolios and large investors, algorithmic traders, and their high frequency trading sponsors. Increasing the cost, and the availability of detailed order information, including the depth and price variation of orders, facilitates high frequency trading and algorithmic orders. This has costs to all other investors, including any retail investors, or even any other portfolios, pension funds, corporate funds which do not have access or the willingness to utilize the more realtime, more costly data feeds. In times of small price moves, this merely erodes execution and best price obtaining by retail investors. In times of big, market defining price moves - fed actions, new information from currency markets or job reports or FDA drug approvals or disapprovals, it traps the slower traders and lets the "first data feed traders" grab large amounts of profit.

As one blog about this issue of data access and latency arbitrage has commented, this is a significant change in how US capital markets operate and perform.

"What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that , they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.

With these changes the fastest players were now able to make money simply because they were the fastest traders. They didn't care what they traded. They realized they could make money on what is called Latency Arbitrage. You make money by being the fastest and taking advantage of slower traders.

It didn't matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.

This is where the problems start.

If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.

So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market.

When I say algorithmically, it means that firms are using their speed and their brainpower to take as many data points as they can use to predict what trades will happen next. This isn't easy to do. It is very hard. It takes very smart people. If you create winning algorithms that can anticipate/predict what will happen in the next milliseconds in markets/equities, you will make millions of dollars a year. (Note:not all algorithms are bad. Algorithms are just functions. What matters is what their intent is and how they are used)

These algorithms take any number of data points to direct where and what to buy and sell and they do it as quickly as they can. Speed of processing is also an issue. To the point that there are specialty CPUs being used to process instruction sets. In simple terms, as fast as we possibly can, if we think this is going to happen, then do that.

The output of the algorithms , the This Then That creates the trade (again this is a simplification, im open to better examples) which creates a profit of some relatively small amount. When you do this millions of times a day, that totals up to real money . IMHO, this is the definition of High Frequency Trading. Taking advantage of an advantage in speed and algorithmic processing to jump in front of trades from slower market participants to create small guaranteed wins millions of times a day. A High Frequency of Trades is required to make money.

There in lies the problem. This is where the game is rigged."

Therefore the SEC should analyze such changes not merely on competition between exchanges, but also on overall exquity market structure and performance, perhaps by giving presentations to the Equity Market Structure Committee (after appointing a few more consumer ,retail, academics-without-conflicts, and public interest representatives to that committee)