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Nasdaq will end an undisclosed high-speed trading service it offered to a handful of its client trading firms after coming under scrutiny from US regulators.
The US stock exchange had been marketing to selected customers a new fibre optic cable that cuts the time to execute trades on its market by up to a third, drawing the ire of competitors who were unaware of the unpublicised service.
The dispute underscores how the technological arms race that underpins modern day trading is heating up again as cheaper and more efficient equipment becomes available.
In February US telecoms group McKay Brothers complained to the US stock market regulator that Nasdaq was “covertly” offering some customers access to hollow-core fibre optic cables, which can carry trading data far quicker than the standard solid-core counterparts.
When approached for comment by the Financial Times, Nasdaq said: “In close consultation with the regulator and our clients, Nasdaq has begun discontinuing the service.”
In the past services for high-speed traders have been controversial, leading to accusations that exchanges favour one set of customers over others.
Exchanges, under pressure from shareholders, compete with rival service providers and high-speed firms in spending millions of dollars on physical infrastructure such as microwave antennas, cables and short wave transmitters, to shave microseconds off the time it takes to do deals.
Global equity markets are dominated by high-frequency trading firms that use complex algorithms to spot price patterns and automatically place huge volumes of very small trades.
For firms seeking out arbitrage pricing discrepancies that can last for as little as 10 millionths of a second, even tiny speed increases translate into a critical advantage.
In its letter to the US Securities and Exchange Commission, McKay alleged that Nasdaq — the second most active stock trading venue in the US by volume after the New York Stock Exchange — had been selling the right to upgrade to the faster cables for an additional monthly fee of $10,000, without publicly disclosing that it was doing so.
McKay said it had assumed Nasdaq provided solid-core cables to all of its customers.
“Several market participants were as surprised as we were to learn that Nasdaq covertly provides select market participants with such a latency improvement option,” said McKay Brothers’ chief financial officer Jim Considine, in a letter dated February 12.
Bill Singer, a lawyer and former regulator at the American Stock Exchange, said “a given stock exchange’s reputation rises and falls to the extent that traders and investors repose confidence in the integrity of that operator”.
“The disconcerting aspect of Nasdaq’s alleged conduct is that it involves a failure to disclose . . . Disclosure is the very bedrock upon which the federal securities laws are based.”
Nasdaq is upgrading its main data centre in Carteret, New Jersey, to cope with capacity shortages. It will also undertake an “Equalisation Project” to ensure a level playing field for customers who have placed their servers in Nasdaq’s building to be as close as possible to the exchange’s matching engines, where trading takes place.
Nasdaq said in a filing that it designed the original data centre “at a time when latency differences were measured by customers in terms of miles of cable between customer facilities and exchange data centres, rather than in feet or inches within exchange data centres, as is the case today.”
But McKay Brothers said in its letter to the SEC that the availability of hollow-core fibre at Nasdaq’s data centre meant some connections may be “faster than others even where those connections have an identical length”.
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