I am a very keen follower of ice speed-skating, which is a popular sport in my home country The Netherlands. Over the last few weeks I’ve watched skaters participating in World Cup races to qualify for the Sochi Olympics this week, and it occurs to me that there are some interesting parallels between this very competitive sport and the skills I learned in my career in the securities markets.
Speed-skating is a very technical sport where the difference between winning and losing often comes down to just fractions of a second. But this isn’t just a matter of having sharper skates or more training. During a recent World Cup race in Berlin one of the TV reporters made an interesting comment about the winner of the last race. He said that racer had an advantage because he had more “information” than the other racers, which helped him to win and thus qualify for the Sochi Games.
Let me explain. For a race of 5K or 10K, there is a lot of time between when the first and last ‘race pairs’ take to the ice. Each race pair consists of two skaters and a 10k race may take about 13 minutes. Therefore the last pair to race has all the information from the last hour or so of skating, and from all the other pairs of skaters who started ahead of them.
What kind of information does the last race pair have access to over the other pairs? The most important thing is that they know exactly what they need to do to come in first: they don’t have to race as fast as they can, just faster than those before them. All the other skaters just have to go as fast as they can, and hope it’s fast enough. Secondly, this last race pair knows what condition the ice is in and how their counterparts have performed under these circumstances. The exact lap times are known too. Each coach will signal to their racer how many tenths of a second the skater is behind the planned schedule, and the best lap times till then.
One can also measure the humidity of the air and analyze how this affects the performance. Humidity changes over the hour of the race as the presence of the audience creates heat and moisture. Skaters in the last pair have more knowledge here as well and they know what to expect whilst skating.
So all-in-all, the last skaters have both the data and mental advantage: it is better to have all the information available to analyze than to be the first into the field without the data.
As I was watching the races in Berlin, it struck me that this kind of information advantage would never be accepted in the kinds of exchange-traded markets where I spent most of my career. It just wouldn’t be acceptable. In fact, I think it probably would be considered a form of market abuse.
In the exchange-traded markets for stocks, options and futures, all price and market information from exchanges and platforms are broadcast in such a way that no one has the information before others can get to it. Once a trade has taken place, the transaction details are immediately disseminated to the market, and all of the professionals in the market are able to receive that information at the same time.
Of course there are differences in how people use this information. Not everyone is competing at the same level as the speed-skaters, where every fraction of a second counts. A highly automated market maker will process the information immediately as their business model is all about providing bid and offers in the market each and every day. But a pension fund will be less interested in the exact microsecond at which the price information is being broadcast, as they tend to have a long-term investment horizon. Likewise, a retail investor who trades through a broker account probably doesn’t care about microseconds either, as his time horizon is probably between one to three years.
It’s ironic to a market trader that in the sport of speed skating, advantages gained through privileged access to information are allowed – and in fact are built into the rules and format. In the exchange-traded markets, it’s just the opposite. Technology has leveled the playing field and we are leaving behind the world of pre-arranged trading and front running, and obtain exchange information in a non-public way.
Still, I am looking forward to watching the speed-skating races at Sochi and cheering on the teams from the Netherlands. Go skaters!
The views expressed in this blog post are the personal opinions of the author and do not necessarily reflect the official policies or positions of the FIA European Principal Traders Association or the Futures Industry Association.