Street Food: Throw more light on algo issues

While speculation in the market is natural and even critical, speculation about market architecture is not a healthy sign

American writer Michael Lewis begins his Flash Boys book by describing the construction of a 827-mile underground fibre optic cable between Chicago and New York.

A 2014 article published in the UK’s Daily Mail on the book said, “There were already cables linking the two cities but this one was different. The 1½ inch-wide plastic tube containing 400 hair-thin strands of glass had to travel in a straight line, even if that meant passing it through mountains and under car parks and rivers.”

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The project’s boss hated even small deviations. He would tell engineers that even deviating by the width of a road would cost him 100 nanoseconds — or a millionth of a second — in the time it took for data to travel from one city to the other.The £180 million cable would cut the time it took to send a message between the two cities from 17 milliseconds to 13.

“That’s a fraction of the time it takes to blink very quickly; yet, the miniscule time difference is enough to allow sophisticated computer programmes to exploit profitably tiny price differences between the Chicago and New York stock exchanges. These split seconds saved in the transmission of information, an expert calculated, were worth an astonishing £12 billion a year to those who knew how to exploit these. The new superfast cable would be used by around 200 trading companies, and its owners were asking each potential client to pay more than £8 million for the privilege,” the article said.

Two years later, Business Standard reported an investigation by the Indian market regulator that is currently in progress, looking into a similar connection, although over a much shorter distance, between Bandra-Kurla Complex and Fort in Mumbai.

A Singapore-based whistleblower has described this as a “dark fibre” link between the National Stock Exchange and BSE (formerly Bombay Stock Exchange). He has alleged this link gave its users a five-times speed advantage over the market. Who has inspired whom? Are Indian traders learning their American counterparts’ tricks or is the whistleblower getting ideas from Lewis?

The market is abuzz with speculation. It is for investigators to arrive at a conclusion. But, such investigation can’t take forever. While speculation in the market is natural and even critical for its survival, speculation about the market architecture is not at all a healthy sign. It has to be put to rest at the earliest.

The letter has sent the finance ministry, worried about systemic risks and losses to small guys, into a tizzy It has sent at least three letters over the past five months to the Securities and Exchange Board of India (Sebi), for a report on the matter.

Ever since the first whistleblower account became public about nine months earlier, there have been noises from the establishment, indicating they want to tighten regulations and even slow down algoithmic trading. By some estimates, it accounts for about 40 per cent of the trading volumes in India.

The whistleblower has written three long letters, each of which have raised a plethora of issues. While the exchanges have rubbished these to reporters and to regulators in bilateral communications, the lay investor is still in the dark. Both exchanges, also considered frontline regulators, and which often ask for clarifications from listed companies, should occasionally apply these standards on their own workings, too.

In a market where millions are made and lost in a matter of nano seconds, months have gone past without any clarity on the issues raised by the whistleblower. It is time for Sebi to put out a detailed and easy-to-understand report addressing all the issues.