Most money managers route their orders to brokers, who in turn send them onto various exchanges or dark pools, depending on which has the best price.
But as the U.S. stock market has become more fragmented, critics say high-speed firms have exploited the minuscule differences in time for trades to reach various exchanges to step in front of large investor orders. Even presidential hopefuls have stepped into the debate, with Hillary Clinton proposing a tax on one controversial HFT trading strategy.
Last year, trading by HFT firms accounted for about half the volume in U.S. stocks, according to the Tabb Group.
For their part, high-speed firms say they lower transaction costs by taking the other side of hundreds, if not thousands, of trades each day on various exchanges. Firms like Citadel Securities, a unit of billionaire hedge-fund manager Ken Griffin’s Citadel LLC, also serve as registered market makers.
Atomic Clocks
Whatever the case, Renaissance is taking matters into its own hands.
Its invention, developed by the firm’s co-chief executive officers, Robert Mercer and Peter Brown, first sends an order to a central server, which breaks it up into multiple smaller orders. Those are then routed to venues that offer the best prices and most liquidity, much the same as brokers do now.
But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along with instructions on the precise times they should be executed. The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it.
A crucial part of the system is the optical, atomic or GPS clocks that will be used synchronize those orders. Renaissance says in its application that GPS clocks are accurate to within nanoseconds and any time differences between them are “too small to be perceived” by HFT firms.
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