High-Speed Traders Profit From Return of Loophole at CME

The Wall Street Journal ^ | 12 Feb 2018 | Alexander Osipovich

[Theoria]

Tiny gap between private trade confirmations and public data feed can be exploited to detect market moves, critics say

Five years ago, the world’s largest exchange operator vowed to fix a flaw in its systems that allowed high-speed traders to infer the direction of the futures market a fraction of a second before everyone else.

Now, the defect is back at CME Group Inc.,traders say. And some allege it is yielding rich profits for ultrafast firms at the expense of ordinary investors.

The problem arises from the two ways that CME distributes information about a trade. One is the private confirmation messages that the exchange sends to the buyer and seller in each transaction. The other is the public data feed that reports trades to everyone active at CME, a Chicago exchange where an average of 19 million contracts changed hands daily in January.

Sometimes, a firm will receive the private confirmation of its trade just before it is reported over CME’s data feed. During that delay—called a “latency”—an ultrafast firm can deduce that the market is about to move up or down, and quickly buy or sell to profit from that information, traders say.

A CME spokeswoman said the firm had “dramatically decreased the latency between public market data and private trade confirmations” since 2013, when the issue was exposed in The Wall Street Journal. But she acknowledged that private confirmations were still arriving first in some cases.

[Wolfie]

That's the new business model in the U.S.: Scam Fast, Scam Often, and Scam Bigly

[frog in a pot]

Thank you for that.

OTOH, it can be fun playing follow the leader so long as they are somewhat detectable and hold their position for more than say 10 seconds. Some do, most do not.

Those who do not pay commissions and have state of the art computers and programs will always beat the rest of us by some greater or lesser percentage.

[Revel]

And we need a new law that anyone caught exploiting this loophole has all of their assets taken.