A New Fast Lane for Traders Spurs Plan to Thwart Exploiters

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Fast Cable Adds a New Kink to Transatlantic Trading

ICAP Plc is introducing a speed bump on its EBS currency market that prevents some customers from leveraging a new, faster fiber-optic cable connecting New York and London from taking advantage of other clients.

Hibernia Networks will soon switch on its $300 million transatlantic cable linking the major market centers, offering data transmission that’s about 8 percent faster than other means. For traders who sign up, it can alert them to price moves before everyone else, conveying a potentially profitable edge.

ICAP is trying to level the playing field on EBS, which is one of the world’s biggest currency markets. The curb will prevent traders from canceling quotes as quickly, making the time difference between Hibernia’s best service and slower fiber-optic lines less relevant.

The decision by ICAP contrasts with how exchanges have catered to high-speed traders for years, and could be a sign of weariness in the industry about the expensive race to build ever-quicker trading routes. IEX Group Inc. is among market operators that have also sought to stop faster data connections from helping one subset of the industry exploit the rest.

“The focus on maintaining fair markets is appropriate,” said Michael O’Brien, director of global trading at Boston-based mutual-fund company Eaton Vance Corp.

Hibernia’s ultra-fast cable connects the world’s two most important foreign-exchange hubs -- New York and London -- setting up an opportunity for firms to arbitrage prices between the two cities. Speed matters because a trader with a faster connection can discover and react to price changes on a distant market before others.

The Ecosystem

EBS’s reaction to Hibernia doesn’t mean its parent company opposes computerized trading. Only last month, Chief Executive Officer Michael Spencer said that high-frequency traders “are an important part of the ecosystem.” It does suggest, though, that ICAP wants to bar certain HFT strategies on its markets.

ICAP’s EBS venue has three matching engines -- industry jargon for the software that pairs buyers with sellers -- in London, Tokyo and New York, and a single order book. That system is held together over a data network that’s slower than Hibernia’s service. That creates gaming opportunities for subscribers to Hibernia.

Phantom Liquidity

For example, a market maker could post bids and offers in London, New York and Tokyo. After transacting in one location, the market maker could use the faster connection to race ahead to the other matching engines and cancel the outstanding trades. The market maker would have gleaned information about a counterparty’s intentions without necessarily having to complete all of the order. It could also make the order book look like there’s more liquidity than there really is.

To stop that from becoming a common trading tactic, EBS will make it harder in some instances to cancel quotes. That should mean traders don’t have to pay for Hibernia to avoid being at a disadvantage on EBS.

“To ensure that EBS Market continues to operate a healthy trading environment, we have proactively created a solution known as distributed quote interrupt,” said Serra Balls, a spokeswoman for ICAP.

EBS’s new feature will undergo trials starting on Aug. 17 and will be fully implemented on Sept. 7, according to a notice sent to customers by ICAP, which explained that it was trying to eliminate “potential gaming opportunities.” Hibernia is scheduled to go live by next month.

$20 Million

The new Hibernia line takes 59.5 milliseconds to transmit data from one side of the Atlantic Ocean to the other and back again. That’s about 5 milliseconds faster the best route today, Hibernia Chief Executive Officer Bjarni Thorvardarson said.


Hibernia’s fastest service will cost up to $20 million for five years of access, which equals $333,333 a month, according to a trader that Hibernia pitched. Customers can also choose a slower option, which takes 62 milliseconds to make the round-trip transmission, for about $35,000 a month, according to the trader, who asked not to be identified because of confidentiality agreements.

The cable spans from Halifax, Nova Scotia, to a seaside U.K. town named Brean that’s home to a water park and a land yacht club. Thorvardarson declined to say how much his service will cost. The majority of Hibernia’s bandwidth will be used not by trading firms, but rather by the likes of Internet-service companies.

Dwindling Volume

EBS is no stranger to high-frequency trading, which sprung up on the venue in the past decade. An Aite Group LLC report in 2013 said trading volumes dwindled on the venue in part because bank customers felt they were losing money to HFT firms.

Dealers responded by setting up the ParFX foreign-exchange venue. Gil Mandelzis became CEO of EBS in 2012. In August 2013, the company introduced a speed bump, known as a latency floor, to reduce the attractiveness of speed as a trading strategy. ParFX has a similar feature on its venue.

Mandelzis has called trading that relies purely on speed and massive technology expenditure a “race to the bottom.”

He’s not alone. Norway’s sovereign-wealth fund said in a recent paper that striving to be the fastest trader is “ultimately a dead-end.” Even though computerization helped enable competition and reduced costs, going ever faster is becoming “extremely costly and potentially counterproductive,” it said.

While Hibernia was engineered to connect London to the data centers in New Jersey, just outside New York, it will also provide users with faster access to other financial hubs, Thorvardarson said.

“All the markets between Chicago, New York, London and Frankfurt are going to be very impacted by this,” he said.

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