Algorithmic pioneer: How to slow down the market


In a glowing article about the founder of Interactive Brokers, Traders magazine notes that, ""Thomas Petterfy is, in effect and reality, the father of algorithmic trading."

It writes that, "The Hungarian immigrant began as a black box programmer on Wall Street in the 1960s. About a decade later, starting his own business, Peterffy ran afoul of Nasdaq, when he tied an IBM computer to the terminal that brought in quotes from that market and into which new orders were fed. In effect, he had hacked into the terminal to get its data on trades as they took place and used hard-wired connections back to the terminal to pump in orders, by mathematical rules. This was the first fully automated algorithmic trading system in the world."

So what would he do about the high frequency trading?

Traders quotes Petterfy's surprising prescription: "I would like the SEC slow them down by say a second or half a second, or something like that. And I wouldn't slow down all trades; I would only slow down the liquidity-removing trade. There's a big difference. I wouldn't change the liquidity-providing trades."

That's anathema to many. How would this be accomplished? Petterfy thinks the circuit breakers and Rule 15c3-5 are good starts. He would add two more rule sets. One would require a layer of software to "evaluate each order in terms of the resulting position as part of the pre-existing position and if such position could not be supported within the broker's or its customer's capital then the order would have to be rejected."

Petterfy would also add some software checks at the exchange level, a move that seems reasonable enough.

For more:
- here's the article