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Man Vs Machine: The Battle Rages

Hear what legendary trader Jim Simons has to say about the controversy involving servers that are co-located with the servers of the NYSE.

As you may know part of the controversy surrounding the flash crash involves something known as co-location.

According to Time magainze about 130 NYSE clients use its co-location services where the service is marketed as something of an advantage — "when proximity to the market can give your business model a competitive edge."

That edge can translate into huge profits for high-frequency-trading firms like Goldman Sachs, which, according to Bloomberg, made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71% of the time — partly thanks to high-frequency trading.

Considering the growing controversy surrounding this practice we thought it made sense to turn to the father of quant trading, Jim Simons for insights. Here’s what he told us:

MELISSA LEE: The-- well, there's a perception that if there are people who have information, can act more quickly than others, then it's sort of a binary situation where one person is a winner because they have that information and can execute more quickly, and another person, such as a retail investor, would be a loser in that situation. Is that the case? Because that's, sort of, what is driving--

JIM SIMONS: Not only is that the case--

MELISSA LEE: --the case against-- high frequency.

JIM SIMONS: Not only is that the case, it has been the case ever since investing was invented. The person who knows something first has an advantage, right?

MELISSA LEE: And can act more quickly?

JIM SIMONS: And can act more quickly.

So the whole goal in investing is to learn something before everybody else knows it. That's what you wanna do. No one wants to say, I'll be the last to know. That's not a very good policy for how to select-- stocks and investments. Now, there's only so much of a trade you can get off knowing something a second before the next guy. You can get off something, but in a second, you still can't do-- a huge trade.

MELISSA LEE: So people who are decrying the servers that are co-located with the servers of the NYSE in order to make that trade that much faster--

JIM SIMONS: Yeah.

MELISSA LEE: -that's not something that people should be--

JIM SIMONS: No, in fact--

MELISSA LEE: -worked up about?

JIM SIMONS: They should not be worked up about it. And those people, for the effort that they're doing, are gonna make some money as result of being, you know, milliseconds faster than the next guy. On the other hand, it's going to be way overcome by the additional liquidity that all of that is-- is-- is-- providing.

And those narrower spreads and easier-- executions save billions. So the friction is getting taken out of the market. And friction is never good for anybody




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Trader disclosure: On September 14th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (AAPL), (BAC), (MSFT); Finerman’s firm owns (BAC); Finerman’s firm owns (GLW); Finerman’s firm owns (HPQ); Finerman’s firm owns (JPM); Finerman’s firm owns (IBM); Finerman’s firm owns (BBY); Terranova Owns (APA), (AAPL), (ARUN), (BMO), (C), (DO), (EOG), (FCX), (FTO), (XBI), (GS), (HES), (IBM), (JOYG), (NBR), (NOV), (OXY), (ORCL), (PEP), (POT), (RSH), (GLD), (SLB), (SWN), (SU), (SPLS), (RIG), (UPL); Jon Najarian owns (AAPL) call spreads; Jon Najarian owns (ARST) calls; Jon Najarian owns (CSCO) call spreads; Jon Najarian owns (RHT) call spread; Cortes is short Crude Oil; Cortes owns (RIMM)

For Brian Kelly
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SOLR)
Accounts managed by Kanundrum Capital own (RIMM)
Accounts managed by Kanundrum Capital own (TLT)
Accounts managed by Kanundrum Capital own Japanese Yen
Accounts managed by Kanundrum Capital are short Australian Dollar

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***No Disclosures***

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Weiss owns (CSX)
Weiss owns (UPS)

For Scott Nations
Nations owns MSFT

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Terranova is chief market strategist of Virtus Investment Partners, LTD.
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For Patty Edwards
Edwards owns (HPQ) for clients
Edwards owns (MSFT) for clients
Edwards owns (BAC) for clients
Edwards owns (GLW) for clients
Edwards owns (GLD) for clients
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Edwards owns (VXX) for clients
Edwards owns (PGM) for clients
Edwards owns (C) for clients

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