Noah denkt™ - The Power of Balanced Reasoning
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More crony capitalism
Dialogue with the Alter Ego on co-located servers for high-frequency trading, drafted and published  on May 3,
2014
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    Here's how firms capitalize on one aspect of high-frequency trading known as co-location: after paying a fee to an
    exchange, firms are allowed to co-locate, i.e., rent server space within or near the NYSE or another exchange's
    computer servers to get access to trading statistics faster — just milliseconds faster — than competing investors. -

    Kristi Oloffson and Stephen Gandel: High-Frequency Trading Grows, Shrouded in Secrecy, in Time Online,
    Aug. 05, 2009  


Question by Alter Ego of Noah denkt™ (AE): Supposedly, Noah denkt™ is aware of the practice of high
frequency trading that some Wall Street firms apply to generate profits in their financial speculation?

Answer by Noah denkt™ (Nd): Yes, we are.

AE:  Is Noah denkt™ equally aware that stock exchanges all over the world rent out server space within or near
their own computer servers to those flash traders in order to provide them with faster access to the exchanges’
trading data?

Nd: To be honest, we have only learned about this recently due to
an article in Pam and Russ Martens’s Wall
Street on Parade - Blog.

AE: Should this project not have been aware of this practice way earlier than this? After all, it can’t be denied
that the issue has been widely reported on by insiders such as Michael Lewis ("Flash Boys"), Sal Arnuk and Joe
Saluzzi ("Broken Markets") and others.

Nd: Yes, we should have taken note of this way earlier. But we initially considered this flash trading hype as just
another gimmick in the market. Perhaps, that is the reason why we didn't pay enough attention to it.

AE: So, now that you have finally gotten aware of the special access aspect of flash trading, what do you make
of it?

Nd: Obviously, we are quite appalled that stock exchanges who are expected to work as co-regulators in
conjunction with
the Securities and Exchange Commission in order to ensure the sound functioning of financial
markets would engage in such frivolous practices. After all, it can’t be denied that this co-location offer violates
the spirit of equal access to the market for all market participants.

AE: Well, the exchanges justify this practice by arguing that anyone willing to pay the co-location rent can get
access if they want to. Hence, in their mind, the fair access clause isn't being rigged?

Nd: That argument is clearly a joke since the NYSE itself markets the co-location service by assuring future
clients that the new found “proximity to the market can give [their] business model a competitive edge." In other
words, the NYSE itself doesn't believe its own equal access protestations.

AE: And what do you make of the argument that the co-location service to some isn't infringing on the fair
access clause for all since it is by no means clear whether the algorithms employed by the few co-locating flash
traders are indeed good enough to keep them ahead of the crowd?

Nd: This is equally ridiculous since it shouldn't be the duty of the crowd to evaluate the potential for non-
compliance with the equal access rule but the onus should be on the regulator to make sure that the equal
access idea isn't being undermined. Look, regulations make sense only if they are sufficiently clear and evident
to all parties concerned. Any uncertainty, any doubt, any lack of clarity and transparency generates a
dysfunctional regulatory environment and thereby damages the solidity of the entire market. Co-regulators and
regulators, therefore, don’t do their job adequately if they engage in or allow for questionable practices within
their own operation.

AE: How then do you explain that such practices continue to exist without major political opposition to them?

1Nd: Well, it is probably due to the fact that all systems have a tendency to favor their established players that
crony capitalism can develop so easily.

AE: If it is true however, that all systems have a natural tendency to grant preferential treatment to their
powerful and well established how does that then impact your own preference for a free market approach over
interventionist policies?

Nd: Well, if the government is already giving preference to the established players when it acts as a regulatory
umpire then it is only natural to presume that its actions will be even more tilted towards the powerful when it
intervenes in a more aggressive fashion in that marketplace. And evidence, such as
the bank rescue or the
auto industry rescue support that theory.

AE: The government spending on social security isn't biased in favor of the strong and established players, is it?

Nd: In a way, it is since it is coming with the same patronizing, status-quo and system preserving attitude that
the established players employ when dealing with newcomers and no-names on their own turf.
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Keywords:

high frequency trading, flash trading, locating flash trader servers close to stock exchange
servers, co-locating in stock exchange server space, crony capitalism, crony capitalism in
high frequency trading, equal access to financial markets
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