According to the French economic daily Les Echos, the IT platform of Paris’ stock exchange (NYSE Euronext) should move from the Paris suburbs to a placed held secret in London.

It does not mean much probably for US traders, but once you look more into depth in the motives of this transfer, you notice that this is closely linked to the surge in “robot trading” and the significant erosion of NYSE’s market share. According to a “specialist” quoted by the French paper, most of the servers and arbitrage trading firms are based in London. Arbitrage trading means taking advantage of the micro-differences in reaction time between two markets to make profits out of variations. It is also better known as one of the forms of HFT (High-Frequency Trading).

Whereas in “human” trading the execution speed is a factor which might influence the success, but in limited proportions, HFT needs speed to be efficient. As the journalist reports, all the mathematic models structuring the arbitrage start to look the same, hence the early competitive advantage that some firms could have is getting smoothed out.

In these conditions, the speed of analysis and of execution  (miliseconds) determines the success or failure of the strategy. In that regard, the distance from London to Paris and the latency time in electronic communication are sufficient to provide a powerful incentive to change trading floor for many of the quant/arbitrage/HFT programs in favor of competitors such as Chi-X or BATS.

“Unexepected” aspect: the French arbitrage firms will now be at a disadvantage in trading. Let’s not even talk of the average trader. And then of course, Paris will lose its trading importance (nice little side effect which of course wasn’t planned at all).

Do HFT programs count electric sheep?