Is Tiered Data Access Unfair, or the American Way?

Caught up in a wave of pressure to make the banking industry pay for wrecking the economy, the SEC and a few prominent politicians have turned their collective gaze toward high-frequency trading (aka algorithmic or electronic or flash trading).  Among the major criticisms of the practice is that it is unfair – the haves pay for milliseconds-early access to market data and use expensive computing systems to make voluminous trades before pending trades complete, while the have-nots are left playing catch-up.

Playing off these fears, Marshall Kirkpatrick at ReadWriteWeb asked what would happen if a similar practice caught on with real-time web data. What would happen if Facebook decided to sell its mountains of data to the highest bidders, which could in turn launch targeted marketing or intelligence strategies that would leave their competitors in the dust? I ask this question: In a capitalist society where winner-takes-all tends to be the name of the game, is unfairness really that bad a thing?

In fact, our country’s national pastime operates much the same way. In major league baseball, the New York Yankees spend more than $200 million a year in payroll — most of which goes toward high-priced free agents — whereas small-market teams top out at around one-third that number. Teams like the Yankees even pay above market value for players who can marginally improve one small aspect of the team’s performance,  and they don’t mind paying a luxury tax as a result of this rampant spending. At the highest level, every competitive edge matters, and teams with deep pockets will pay whatever it takes to ensure success.

On the other hand, if a team like the Tampa Bay Rays wants to be competitive – and its presence in the World Series last year proves it is possible – it must invest its limited resources wisely and build its own talent pool. The large-market teams win in large part by buying up all the best talent; small-market teams win by spending smarter and getting a little creative. That being said, if Tampa Bay felt that signing the best-available player would be a worthwhile expenditure, there is nothing stopping it from reshuffling its finances to make room for that huge salary.

Why should financial data and technology be any different? High-frequency trading gives firms a competitive advantage, so large investment banks are willing to spend their money on expedited market data and the ultra-high-end systems and software that act on that data before anybody else can.  Somebody has to make the trades first.

Smaller traders hardly are priced out of the game, however. They can overcome the data disadvantage by investing smarter over the long run or by investing resources in other aspects of trading. They can overcome the discrepancy it IT budgets by building component-based trading systems instead of top-of-the-line processing machines or by or by placing their algorithms on hosted resources as close to exchanges as possible. High-frequency trading has been around for years, and yet smaller firms have managed to spend wisely enough to continue being part of the game. And like their small-market baseball counterparts, small trading firms always are free to pay for services and technologies generally reserved for large players if they believe such investments will pay off.

On the web, general web data is free to anyone with the will to analyze it, so issues tend to arise around data analysis instead of data access. Thanks to the democratization of analytical tools like MapReduce, even massive-scale data analysis is theoretically open to everybody. But if social data from locked-down sites like Facebook becomes as valuable as market data, we very well could see the shift Kirkpatrick suggests, where those willing to pay get premium access. Maybe that means a short-term advantage until somebody comes along and levels the playing field, or maybe it means a perpetual multi-tier system for capitalizing on specific data sets. When data becomes a critical resource, you have to pay to play at the highest level, and “unfair” might not be as apt a description as “the American way.”

Question of the week

Is early access to data such an unfair advantage that it needs to be regulated?
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3 Comments Subscribers to comment
  1. Krishnan Subramanian Sunday, August 16, 2009

    You said

    “In a capitalist society where winner-takes-all tends to be the name of the game, is unfairness really that bad a thing?”

    Well, the winner takes all is the norm but it is not the real capitalism. The real capitalism is about creating a level playing ground where the winner can take their gold. The emphasis is on creating a level playing field for market forces to play the game and not on the winner taking all part. In that sense, the tiered approach is not right. ^^^The tiered approach will create what the believers in communist ideology blame the capitalism for. The class based society. The real capitalism is about creating a fair environment for everyone to compete.^^^ My 2 cents.

  2. Krishnan Subramanian Sunday, August 16, 2009

    For your baseball example, I would like to offer the NFL example where the salary cap and winner gets to pick last levels the playing ground. That is one of the reason why even Arizona Cardinals, who were considered to be a laughing stock (no offense cardinals fans), can go all the way to Super Bowl. It happens because of regulations in NFL. ^^^If we have to stay capitalistic, we need to focus on offering a level playing ground for competition. It means no tiered approach.^^^

  3. Derrick Harris Monday, August 17, 2009

    I happen to agree with you, for the most part. I really wanted to raise the question of whether the feigned outrage — especially over algorithmic trading — is justified. Especially in the financial markets, should anyone be shocked that everything is not fair?

    The NFL, actually, is an anomaly among the big three sports, with the NBA having a “soft” salary cap with a luxury tax. Of course, that’s what makes the NFL the most interesting sport to follow.

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