Note: This blog originally appeared on allaboutalpha.com
A paper written late last year by Adam Clark-Joseph may have lit a (longish) fuse, and may yet set off debate over transparency in the high-frequency trading world, and the role of regulators in protecting (or spilling) trade secrets.
Were I disposed to a melodramatic turn of phrase or were I writing for a blog [oh, wait …], I would suggest that there is the possibility of a ‘wikileaks’ type of debate here, and that circumstances may have cast Andrei Kirilenko of the Massachusetts Institute of Technology into an unlikely role: the Julian Assange of account-labeled, time-stamped trading data. But that would be going too far. How much too far, we may see soon enough.
Exploratory trading by A/HFTs
But we begin with Adam Clark-Joseph. In late 2012 Clark-Joseph, of Harvard, was at work on a paper on “exploratory trading” that focused especially on the e-mini S&P futures market. Clark-Joseph found that algorithmic high frequency traders in this market consistently lose money on their “smallest aggressive orders.” But the loss is for them a happy loss, a felix culpa.
They are happy to lose that money because these small orders are “exploratory trading,” giving these traders (giving their computers really) “valuable private information” about supply and demand: the information is private in that it is not available to anyone not engaged in the high-tech HFT arms spiral. Further, Clark-Joseph wrote that this was a good starting point to address “social welfare implications of high-frequency trading.”
Fascinating as it is, Clark-Joseph’s conclusion isn’t the point of this post. The response to the data of which he made use: that’s the point.
Academic papers often circulate for some time before they are ‘published’ in any formal sense. Thus, it is unsurprising that on Dec.14, 2012, a month before Clark-Joseph’s paper was published, lawyers for Skadden Arps, one of the most august of Wall Street’s law firms, knew of it and included it as one of the causes for concern that inspired them to write a letter to the Commodity Futures Trading Commission (CFTC).
What Section 8 Says
Skadden Arps represents the CME Group, and it was the CME’s global system that generated the data of which Clark-Joseph made use. In the Dec. 14 letter, Mark D. Young and Jerrold E. Salzman of Skadden Arps, said that their client routinely provides to the CFTC such material as the global e-Mini S&P message traffic Clark-Joseph reviewed. They refer to this as Section 8 data because it is section 8 of the CEA that bars the CFTC from publishing “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers….”