The dark side of low-latency bandwidth

21 Mar 2013

ITEM: The US Commodity Futures Trading Commission (CFTC) is investigating a number of unnamed trading firms for so-called “wash trading”, which involves acting as both seller and buyer in trades via high-speed computer-driven transactions, reports the Wall Street Journal.

Wash trades are illegal in the US because they can be used to manipulate prices and create market distortions.


What the CFTC is particularly concerned about is whether the exchanges that process high-frequency trades are technologically sophisticated enough to detect wash trades in the midst of all the legitimate super-fast trading going on, the WSJ reports:


With wash trades, one difficulty regulators face is proving the suspect trading is intentional, a standard required by many securities and commodities laws. In today's fast-moving markets, some firms say it is relatively easy for their buy and sell orders to cross by mistake.


But the scale of the suspicious trading activity is so large that it appears to some market watchdogs to be intentional, said people familiar with the matter. Futures-trading data from 2012 being scrutinized by CFTC examiners show that often, several hundred thousand potential wash trades occur a day on futures exchanges, the people said.


What’s all this got to do with telecoms?


Not much, except that in the last few years, carriers like Pacnet, SingTel, Cable & Wireless Worldwide and Tata Communications have launched Ethernet-based connectivity services aimed at financial exchanges with the specific pitch of reducing latency to enable faster high-frequency trading, because every millisecond lost can cost traders hundreds of millions of dollars.


Not that carriers have anything to worry about from a regulatory point of view in the US or anywhere else. Blaming carriers for enabling wash trades is like blaming Facebook for all those annoying, insane political memes yr friends insist on forwarding.


The wash trade story just gets me to thinking about the law of unintended consequences. Faster connectivity means faster trading, and faster trading makes it more difficult to separate the legitimate trading from the illegal trading – which, given some of the recent behavior on Wall Street and the subsequent results, is worrying.


That doesn’t mean we should throttle bandwidth destined for financial exhanges, of course. It’s just indicative of the increasingly complex communications ecosystem we're already heading towards (an example of which I blogged about earlier), and the importance of adapting and keeping up with it.


Which in turn reminds me of something Bruce Schneier, BT's chief security officer, said in a recent interview with our sister site Enterprise Innovation on the topic of complexity:  


The thing is we absolutely love complexity. It’s down to using these new apps on our smartphones, it’s using Skype on our work device while using the airport WiFi. We all like these things and having access to our data at all times, but this creates more complexity and it makes security harder. There’s no way I would advise anyone to stop doing these things so we just have to find ways to live with this. If you look back to five years ago, we were all discussing how to lock down all our access points to the enterprise. Today all the data resides outside the network, so who cares about where the access points are today? That’s the ongoing evolution we have to accept and deal with.



Thumbail image from server side store: 

John C. Tanner


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