Could Real Time Information Be An Unfair Advantage?

The US Securities and Exchange Commission is considering a ban on a stock market practice known as “flash trading,” where supercomputers get access to information milliseconds before other traders and can rapidly buy and sell in ways that are argued to influence the market unfairly – thus discouraging mere mortals from participating.

Many bleeding-edge trends in the consumer web play out writ large in financial markets; as all of us look at the growing prominence of real-time information on the web, the debate over flash stock trading raises issues worth considering outside the stock markets as well.

If the real time web at large grows up open and democratic, then we’re likely to see innovation, understanding and growth. If it’s priced out of reach to all but marketing and state interests, then an experience analogous to that of small-time stock traders today could become what the web at large looks like.

It’s easy for technologists to say that this is progress and rejecting the advantages technology brings would demand a return to time before the abacus. It’s not so easy to explain why we have to take an all-or-nothing approach to judging technologies and their implications – why not look at them one at a time and evaluate them intelligently?

Here’s how the introduction of real time information is being debated regarding financial markets, followed by some thoughts about the analogous transformation going on around the web.

This isn’t just a story about robot stock traders and the SEC; it’s also a story about Twitter, Facebook and the Pushbutton Web.

Robots in Financial Markets

Last month the New York Times’ Charles Duhigg wrote a high-profile story about the practice of high frequency trading, including this juicy description of the practice:

Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

Rich Miller, writing at Data Center Knowledge, a blog that tracks the powerful computers that high frequency traders (among many other industries) use, called the article one-sided and inconsiderate of the argument that “this activity provides liquidity to execute trades that would otherwise not be possible, making the market more efficient.” He also said the press was widening the debate over the practice by bringing it into the mainstream.

Now U.S. Senator Charles E. Schumer (D-NY) has sent a letter to the SEC this week, calling for action to be taken against the practice of flash trading in particular, the act of selling for a fee access to trading information milliseconds before it is otherwise available. He argues that the practice “creates a two-tiered system where a privileged group of insiders receives preferential treatment, depriving others of a fair price for their transactions. If allowed to continue, these practices will undermine the confidence of ordinary investors, and drive them away from our capital markets.”

Schumer focuses on the early access to information, but always in the context of the computer-driven trading that occurs based on it.

Trader John Hempton writes that critics over-estimate the financial impact of flash traded stock, needlessly complicating a situation that he describes with the following, fascinating, story:

We trade electronically at our fund. We were recently trading in a stock with a large spread. I have changed the numbers so as not to identify the stock – but the ratios are about right. The bid was about 129.50, offer was about 131.50. We did not want to cross the spread – so when we bid for the stock we bid $129.55. Within a second a computer (possibly at our own broker but it makes no difference which broker) bid $129.60 for a few hundred shares. We fiddled for a while changing our bid and watching the bot change theirs. We would have loved to think we were frustrating the computer – but alas it was just a machine – and we were people up late at night.

Actually obtaining the stock required that we paid up – and when we did so it was probably a computer that sold the stock to us.

…It is always there – even when buying defaulted debt that trades once per month. We simply ALWAYS find the bot.

What About Real-time Robots on the Web?

Could the real time web give some people such an unfair advantage over everyone else that non-early adopters of new technologies or people outside of marketing firms could be left out in the cold? Presuming we’re talking about important, actionable information online and not just real-time chat and fun – it’s possible. The question is: will the most important parts of the real time web be open and democratized, or proprietary and shared only with those who can pay a high price for access? That question hasn’t been answered yet.

If you were among the people who purchased the new Breaking News Online (BNO) iPhone app (released an eternity ago, yesterday!) then today you probably found out about the two US journalists being freed from North Korea and the shooting in Pennsylvania at least 45 minutes before almost anyone else did. (CNN posted a link to local PA news 45 minutes after the BNO network published.) That notification system costs $1.99 to purchase and $1 per month to stay subscribed.

If you’ve visited Yahoo’s social-bookmarking turned real-time news service Delicious since this morning, you’ve seen that hot news links are now found not just by vote counting, but with a new method augmented by tracking the open, rapid conversations on Twitter.

These are innovations built out of elbow grease and publicly available feeds of data. Yahoo might be, but the scrappy guys at Breaking News Online definitely aren’t, using software something like IBM’s new stream processing software, for which it will charge “at least” hundreds of thousands of dollars.

No, this real-time public web is very low cost and increasingly both open sourced and decentralized. It’s akin to what Anil Dash calls the pushbutton web.

Pushbutton is a name for what I believe will be an upgrade for the web, where any site or application can deliver realtime messages to a web-scale audience, using free and open technologies at low cost and without relying on any single company like Twitter or Facebook. The pieces of this platform have just come together to enable a whole set of new features and applications that would have been nearly impossible for an average web developer to build in the past.

As long as it’s open and low cost, real time information on the web should be as democratic and fair as computer use is. It’s not perfect, but it’s no longer the David and Goliath-on-steroids fight that critics of high frequency stock trading say that market has become because of real time stock data.

The Risk: Facebook

The real time web is a shimmering mass of conversation and data, but there’s no guarantee that it’s going to stay open, free and democratic forever. Already, in fact, there’s no bigger river of the real time social web than Facebook. Facebook is simply huge, it holds huge sums of information and so far it allows aggregate access to no one. As far as we know.

If Facebook, or some other equally important site of the real time web, began offering access to its data but pricing mere mortals out of that market – then we could have a situation where individual software developers and social scientists were like grandpa reading the stock pages in the newspaper and huge marketing firms and government agencies had the kind of advantage that high frequency traders are alleged to have in financial markets.

Anil Dash puts it this way:

Pushbutton technologies are not just free and open, they’re decentralized, which is a serious threat to the “lobster trap” model of social software. We can expect serious competition from the centralized networks that are currently building these sorts of systems. If a threat arises to Pushbutton’s adoption, this is the most likely source. Worry? Definitely.

In addition to development concerns, there are also analysis concerns. If stock trading equals liquidity and knowledge is the new currency, then open access to aggregate data could be the equivalent of high-powered stock-trading tools for all instead of for just the already-richest few.

Some research has already been performed on the connection between communication on social networks and real-world events. The Information and Language Processing Systems Informatics Institute at the University of Amsterdam, for example, correlated mood messages on LiveJournal closely with world events. (“Mass increase in the level of worriedness around major weather phenomena, such as hurricane Katrina on August 29, 2005 – Excitedness around global media and culture events, such as the release of a new Harry Potter book on July 15, 2005 – Mass increase in the level of distress and sadness after terror attacks, as witnessed by the response to the London bombings on July 7, 2005.”)

Analysis of real time mass communication could lead to a world of innovation and understanding – if that communication is an open fire hose of data and not shared only with deep pocketed commercial partners.

Everything is Complicated, Some Can Afford to Ponder It

Is high frequency, low latency, computer executed, “flash” trading unfair? It must feel that way to individual and small investors who can’t afford killer number-crunching robots – but it’s also pretty awesome technology and is said to provide liquidity that the markets depend on.

Could the real time consumer web be made undemocratic by being priced out of reach for edge-case developers and social scientists outside of government and the corporate world? That could happen.

As we speak, though, there’s a lot of innovation going on in the real time web that’s open, based on standards and available to all of us. Let’s hope it stays that way

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