Measurement is Critical for A True Understanding of the Cost of Liquidity, Reports TABB Group

NEW YORK and LONDON, Jan. 19, 2017 -- The early bird gets the worm, but the early trader in financial markets gains immediate, actionable insight. According to TABB Group, knowing why speed is critical to trading is imperative to understanding how to trade and what happens with your order. New TABB research, “Speed: Why It Matters and What Can Be Done,” discusses trading speed, the macro infrastructure needed, how high-speed traders manage risk and profitability, and what buy-side investors can do to change this dynamic.

TABB Group founder and research chairman Larry Tabb, who authored the report, explains that how quickly you trade is dependent upon your ability to read, analyze and respond to changes in the market and the order book, but understanding where your order is on the book and how that book is moving is also critical. Tabb says that to competitively manage speed requires a significant amount of infrastructure and is determined by your proximity to the exchange matching engine, bandwidth, communications quality, market data integrality, efficacy of your processing engine, and trading logic. All of these technologies and services must be managed appropriately to compete with the big players in the space.

“While trading is anonymous, how participants respond to various market factors enables faster traders to differentiate market makers and HFT liquidity from traditional investor flow. Even without market data ‘tells,’ a fast and informed trader knows the difference between by analyzing reaction times,” says Tabb. “Regardless of how fast the connectivity, how good the data, or how smart the execution engine is, the current market structure will always place the customers’ order at a disadvantage to the very fast/market-maker order. The model used by most all buy-side algorithms is, by definition, slower.” 

The report discusses the limited options available to us if we want to eliminate the structural advantages of speed without giving up the benefits of tight quotes, competition and innovation. Tabb reviews a number of market structure solutions that have been developed to bring parity back to our markets, including auctions, randomized matching, speedbumps and other more structural changes. However, as the report details, the best way for institutions to understand speed and the cost of interacting with liquidity is to measure it, which can only be done by carefully analyzing a firms’ routing practices. Without this analysis, it is very hard for investors to fully understand their cost of liquidity and intermediation, Tabb says.  

The report is now available for download by TABB equities clients and pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the report, contact [email protected].  

About TABB Group

TABB Group is the international research and consulting firm focused exclusively on capital markets, founded on the interview-based research methodology developed by Larry Tabb. Since 2003, TABB Group has been helping business leaders gain a truer understanding of financial markets issues to develop actionable roadmaps and approaches to future growth. By accurately assessing their customer base, competition, and key market opportunities, TABB Group works with senior industry leaders to make critical decisions about their business. For more information, visit www.tabbgroup.com.

Contact:
Casey Sheets, TABB Group
+1 646-747-3207 / [email protected]