CBS 60 minutes did this segment on “Wall Street speed wars” (non-embeddable YouTube) raising the alarm that high frequency traders are effectively getting “inside information” by employing faster networks and faster computers.  This report and many others like it in the media seems to have incited much anger from the public reeling from a financial crisis and recession as well as regulators itching to rein in this phenomenon.

The segment paints the picture that these high frequency traders are effectively parasites on the financial markets and offer no benefits to the general public other than enhanced liquidity (the ability for anyone to quickly sell off stocks on demand at low transactional cost).  Liquidity is nice, but the average Joe probably sees it as left over crumbs from the pie ate up by Wall Street fat cats while everyone else suffers from these high frequency trades.  But do individual traders who are in it for the long haul actually suffer from flash crashes in the market?  No, and I would argue that even frequent human traders weren’t harmed by this because those micro crashes and recoveries were over by the time they even heard about it.  Furthermore, the segment pointed out that safeguards had been implemented preventing extreme changes in prices within a few minutes.

The fact that these high speed traders get their data a few milliseconds sooner than everyone else on expensive non-neutral Internet simply violates many people’s fundamental notion of fairness (or they’d prefer to be the ones with the advantage).  But the Internet has never been neutral in terms of outcome; it’s neutral in terms of opportunity so long as the customer is willing to pay.  It’s no different from Google or other large content providers building or leasing expensive CDN infrastructure to get a huge advantage over everyone else’s content and applications.

I’ve heard some people suggest using some sort of “governor” for the market that gives everyone the same latency, but that would only increase the possibility of cheating because people will try to trick the governor.  The SEC even looked at the possibility of outlawing colocation at the major Exchanges but that merely moves the colocation to the adjacent building.  What next, outlaw colocation in the whole state of New York and Chicago?  Outlaw low latency networks like Spread Networks?  What effect would that have on jobs and the economy?

Even if we managed to get everyone to conduct business in an equidistant circle from the Exchanges, all that does is push the latency to the computer systems.  What next, put a cap on computational performance and put a cap on lower latency computer memory?  That will go over real well at Intel and AMD and massive innovation and economic output they support with the billions of dollars they invest.  High frequency traders and other financial institutions buy high performance computers at a huge premium on the order of 100 times more expensive for 10 times the performance.  These premium customers are essential to chip makers and they drive innovation and make it possible for everyone else to get rapidly advancing technology at affordable prices.

But lets say the networks and the computers were forced to somehow be “neutral”.  All that does is force the differentiation to occur at the human resources level.  Companies that can hire the best minds from MIT, Stanford, Berkeley, etc will have more optimal algorithms that will run faster.  Do we have to have personnel neutrality?  If that doesn’t work, what’s next?  Redistribute the wealth and kill all incentives to work and innovate?

The fundamental reason businesses and individuals spend money is to buy an advantage.  Businesses pay more rent in the mall because it is a better location.  People buy better clothes, cars, and homes to impress other people as well as enjoy those luxuries.  This is what makes the world turn and it drives the economy.  High speed trading, high speed networks, and high speed computers don’t just make a few people wealthy, they are a key driving force for the economy and innovation.  In our current economic state, we need as much activity as possible.