The stock market has increasingly become a battleground pitting traditional investors against modern high-frequency traders. The technology arms race shows no signs of stalling, even as regulators step up their oversight and analytical activity. While many think high-frequency traders still have the upper hand, the buy-side has been busy developing more sophisticated strategies to strike back, essentially putting high-frequency strategies to work for them. 

The battle is not likely to wane. A recent survey by Tabb Group found that half of head equity traders at money-management firms believe high-frequency trading is the most important issue facing the market right now. They will not just sit back and allow high-frequency traders to gain a greater advantage on every order they lodge. They'll step up their monitoring and investment and fight back with appropriate technology. 

The arrival of Thor, a new service from the Royal Bank of Canada, has raised brows. The service was rolled out this month, after two years of development. RBC bank has added about 80 people to its electronic trading team to support the new service--for which it thinks there will be heavy demand. The bank pitches the service as the answer to latency arbitrage, which has angered a lot of institutions. High-frequency traders have developed systems that can react quickly to orders lodged by traditional investors, which might be broken up and sent to different venues. The latency arbitrageurs, once they sense the order price in one of the venues, can essentially cancel bids and offers quickly in the other venues and re-issue them at a price less favorable to the traditional investor. 

RBC's Thor amounts to a smart order router, with an interesting twist. It will also take an order and break it into pieces, with a range of exchanges and dark pools in mind. The twist is that Thor avoids providing latency arbitrage opportunities because it times the orders so they hit venues all at the same time, or at least very close. That closes the window of opportunity for high-frequency traders, giving them less of a chance to cancel bids and offers in hopes of resubmitting them at different prices. As the Globe and Mail notes, the system constantly monitors the time it takes for an order to get from RBC's computers to five Canadian markets as well as 13 U.S. markets, and adjusts the timing of orders to compensate for variances. At least one customer, Hillsdale Investment Management in Toronto, is wildly enthusiastic about the product. 

The irony is that in some cases, it essentially slows down orders, to ensure the pieces of the client's chopped-up order get executed at roughly the same time. 

Is this a breakthrough development? We'll just have to see if the buy-side embraces the approach and if others develop similar services. One expert thinks this will indeed prompt high-frequency traders to shy away from latency arbitrage. "Cynics may argue that the financial and computing resources available to high-frequency traders will ultimately allow them to defeat this order routing stratagem, but it is difficult to see how, provided that the degree of simultaneity it achieves is sufficiently high. While other forms of predatory trading will still be possible, 'latency arbitrage' may soon be a thing of the past." - Jim