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Stock Market Manipulation By Millisecond Trading
cfa22 writes "Nice piece in the NY Times today on ultra-fast trading on the NYSE and other markets. The 'algos' that make autonomous trading decisions have to be fast, but I wonder: Is network speed ever a bottleneck? Can anyone with inside experience with millisecond trading provide some details for the curious among us regarding hardware architectures and networking used for such trading systems?" According to the article, high-frequency traders generated about $21 billion in profits last year.
I believe that precision millisecond stock trading globally is the real reason behind the IEEE 1588v2 precision time protocol. The cisco 9000 enterprise switch supports it. Support has been lacking in smaller switches. The only other group using PTPv2 is the cell phone industry.
The interesting part of PTPv2 for me is that it is used in the 802.1AS protocol ( http://www.ieee802.org/1/pages/802.1as.html ) which is one of the foundations of Audio Video Bridging (AVB) http://www.ieee802.org/1/pages/avbridges.html - Which allows for real time low latency low jitter media streams transported via ethernet with guaranteed bandwidth.
Just yesterday I was joking with friends: Forget about stealing the rounded pennies from bank accounts, criminals could re-program the PTPv2 implementation in switches to steal milliseconds of time during trading!
Anyways, back on the original question, no, network speed is not so crucial once all of your packets are properly timestamped.
--jeffk++
ipv6 is my vpn
My reading of the article brought out the point that, for a few extra bucks, you can actually go to the head of the line - giving the window of opportunity to perform the other actions described. Interesting definition of "free market" ...
Lol.
I often do wonder how we ended up here. Most of the wealth of the world is held not by its citizens, but by corporations. Corporations are owned by funds, which are owned by investors which... and by the time you drill through the obfuscation there seems to be nobody that actually accounts for most of the wealth created by the people that actually produce stuff.
And then you have the wall street leeches who juggle numbers around and suck millions out of... what exactly? The world is not richer for them in any material sense.
All the while I'm wondering why the day I can retire seems further and further away despite massive advances in technology. Shouldn't we all be creatures of (comparative) leisure by now?
The problem is the start-up cost. Buying the necessary hardware, obtaining the required data sources, developing the necessary analytical formulas and coding them efficiently costs a *lot* of money. So it's the free market of people who already have a lot of money and time, or simply an enormous amount of money.
I'm not entirely against it in some cases; well implemented it can smooth out market fluctuations and value securities more accurately. But it still makes me squeamish: It's yet another mechanism by which the rich get richer, and the poor get left behind. Every trade a "normal" person makes will end up costing a small amount more, and the difference goes into the pocket of the HF funds. It feels very much like the "shave the fractional cents off interest calculations" scam: No one suffers individually suffer, but it still feels wrong.
$_ = "wftedskaebjgdpjgidbsmnjgcdwatb"; tr/a-z/oh, turtleneck Phrase Jar!/; print
This kind of activity is an abuse of the free stock market system.
This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.
People should look down on this kind of business and method of trading.
In this case, that is not quite what 'liquidity' means. When you discuss 'the liquidity of assets' you're generally referring to how easily and cost effectively those assets can be converted into cash or other, spendable assets. However, liquidity of a stock/bond/credit in this context is referring to how much that market is actively being traded. A liquid market is constantly moving, an non liquid market is stagnant. Theoretically, the more liquid a market is, the closer it's price is to its actual market value. This is related to the other kind of liquidity, as if you have an investment in a stagnant market, it would be very difficult to sell and turn into cash, but in a financial market context, that's not really what they're referring to.
But we now have clear evidence that the real cost to society of these behaviors is not in billions but in trillions of dollars.
It's like ignoring the price of having the U.S. Army all over the world protecting oil interests in the real price of oil.
The average bonus on WS less than a year after these companies were going bankrupt was over half a million dollars.
Corporations have been hijacked by the executive class for their own benefit- not societies benefit.
Lay 6,000 people off and get a 100,000,000 dollar bonus. But you can only buy 5 or 6 tv's and 3 or 4 cars. So overall demand for product is reduced.
I now have 4 friends laid off and three who are on the edge of being laid off. These are college educated folks with 10 year's experience.
When are we going to stop all this behavior by 2% of the population which is hurting the other 98%?
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
TI'm just wondering why the average Joe has to work as hard as ever and still has a struggle to provide for his (ever retreating) retirement, when traders trade in more than enough for everyone.
I guess that makes me a socialist or something.
I am sorry, I don't work near as hard as my father did. I would have trouble convincing my grandfather that I work at all. Your question doesn't make you a socialist, it makes you an idiot who has no idea what life was like for people through most of history (and still is in much of the world).
The truth is that all men having power ought to be mistrusted. James Madison
All you needed to stop were the bailouts. The behavior at that point would have corrected itself since many of these companies would have been out of business.
I think your question speaks (to me at least) of a more basic question. Do all actions have to be to benefit 'others' in your opinion? I think most actions most people take, are soley to benefit themselves....especially where money/wealth is involved. I don't see anything wrong with that...but, it almost sounds like you do?
Are you implying that nothing really should be allowed to happen unless it benefits society as a whole rather than a single or few individuals?
Just curious...your question just really struck me strangely what what I thought I heard in it.
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
You seem to delight in the fact that the author got an undergraduate degree in History before his Harvard MBA. Either you have an MBA from a competing school, and think that Harvard MBAs don't have to work as hard as other folks, or you have NO MBA, and believe that your "life experience" is better than any graduate degree. Neither qualifies you to judge "arts graduates" as a whole.
This is an outstandingly bogus article, what happens when arts graduates attempt to understand anything except celebrity gossip.
>"The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders."
That's really quite amazingly precise. So precise that I believe not a word of it.
Yes, by all means let's distrust "precise" figures -- you probably ignore facts as well.
I can arrive at a slightly more accurate figure with some simple math. The stock opened at $26.20. The threshold being exploited was $26.39, 19 cents above the opening price. If we allow a for a 5 cent rise from the opening stock price (supposition on my part, but I think it's reasonable to guess that the price moved before the exploits occurred), then the algos gained $0.14 per share on 56,000 shares (from TFA), equaling -- huh, look at that -- $7840.
Not bad for a BFA, if I say so myself.
Amen to that brother.
What they did is going to make it happen again within the next 20 years instead of the next 60 years.
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
Sometimes you have to remind people that *everyone* is touchable.
Deleted
On the way down, the desperate management strips as much out as they can, in self-awarded bonuses and by running as much of the inbound cashflow through - extracting more money from other corporations so that they are damaged - and constraining outbound. The end result is more collapse and economic suffering, not less.
The alternative to this law-of-the-jungle, Libertarian no-tax, no-fed-money "ideal" is progressive taxation. It's an existing mechanism for inhibiting John Galt from excessive, unwarranted greed, and it can be used to redistribute wealth in a directed fashion. For example, to fund a health care system that provides health care for all. Western civilization would still be a good idea.
No, it doesn't.
I think our entire society (Except stock traders) would be a hell of a lot better off if you were required to own stock for six months.
People might actually start purchasing stock based on actual company performance. They'd start expecting to make money via dividends, aka, company profit, instead of random fluctuations in the price caused by CEO manipulation.
Like the CEO, oh, firing half the workforce to cause an upward stock price bump for two months, so they get their bonuses. Oh, and incidentally cripple the company, but what the fuck do they care, they're out the door to another company.
Stock ownership is company ownership. It is not a fucking bingo game. Although if that existed by itself, that would be fine...the problem is that the idiotic bingo games get play by the board, which starts operating the company for the benefit of the bingo game, instead, of, I dunno, the actual company.
As a lefty, I'll complain when companies put profits ahead of employees, but hell, they've stopped doing even that. At least that system worked somewhat. Make the workers too unhappy, abuse them too much, and you don't make as much money.
Now the people running the company are rewarded solely based on an idiotic bingo game, which bears no relationship to how much money the company makes. And it doesn't matter how much the workers abused, because the actual business of actually producing goods and services is irrelevant to the paycheck of the people at the top.
Until the entire company collapses, at which point they walk out the door with a shitload of money and head to another company, whose board will happily hire them because it will make their stock go up. Which they can sell to poor unsuspecting suckers, and walk away with a lot of money to pour into the next business, building it up as an actual industry, until they can hire a stock-pricing oriented CEO and suck all the cash out of that stock, too.
If corporations are people, aren't stockholders guilty of slavery?
Supposedly, yeah. But the big trading houses are doing this. There is no way a human can do millisecond trading.
More like, eaten alive. How many little guys you know have the computing horsepower, software, and bandwidth of one of the major trading houses? Think your 4 GHz Intel box on a cheap DSL can outthink and outmanuever a couple networked Crays on the same T3 as the Exchange? Online trading is quite simply a good way to get eaten for lunch. All it's done is supply more suckers who have NO business in the stock market their opportunity to get bankrupted. And the market is ALWAYS hungry for more suckers. It's the only legal Ponzi scheme out there.
Understanding the scope of the problem is the first step on the path to true panic.