Broken Markets It’s the Data, Stupid.pdf

7 It’s the Data, Stupid On a cold February morning in 2010, we received a short email that would shake up the HFT industry and question the credibility of some major exchanges. The email, which came in from an account that we didn’t know, said simply, “Check out the data feeds. Informa- tion on hidden orders is being leaked.” Being deeply involved in the HFT debate, we had begun receiv- ing quite a few emails from the public. Many encouraged support of our stance. Others were critical and questioned our motives. Occa- sionally, we would receive tips on how to find how HFTs were getting an official edge over retail and institutional investors. We always respond to every email and follow up any clues. This email was a bit different, though. It was short and to the point. To us, it was obvious that the email came from someone who really did know something but did not want to reveal his or her identity. We were familiar with the stock exchange private data feeds and the information that they provided to HFT clients. By early 2010, we had been analyzing the feeds for some time and believed that they contained the kind of data that fueled the HFT engine. If true, the tip that we received could be extremely damaging to any client that was using a hidden order type. A hidden order is placed on an exchange or dark pool, but it is not publicly visible in the quote. Investors who use this type of order are willing to give up their place in the time/price priority sequence to be more discreet about their 111 112 Broken Markets order. Hidden orders are often used by large institutional investors who are trying to cloak themselves to not get spotted by the HFTs. If the exchanges were providing information on hidden orders to HFTs, then the exchanges were violating a sacred trust with their clients.