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.

Comments

Profits, but for whom?

[BadAnalogyGuy]

Traders make a profit on each trade. But the profit is always to the broker.

Ultra fast trading is an interesting idea and done right it can lead to successful short term returns, but if you take a Ferrari around a hairpin at 120mph, you're still going to hit the wall and die.

Re:Profits, but for whom?

[Mr. Underbridge]

Ultra fast trading is an interesting idea and done right it can lead to successful short term returns, but if you take a Ferrari around a hairpin at 120mph, you're still going to hit the wall and die.

Here's what happens when that particular Ferrari hits the wall:

http://tech.slashdot.org/tech/08/09/10/203233.shtml

Re:Profits, but for whom?

[tverbeek]

Can someone explain to me the benefit to society of this kind of activity? I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved, investing capital where it will produce goods/services/jobs, and so on. So despite being a social lefty, I'm not anti-capitalism or anti-stock-market; it has risks and flaws but it works. But how does this kind of stock trading benefit anyone other than the traders themselves?

Re:Profits, but for whom?

[maxume]

In theory it adds liquidity to the market and reduces trading costs for other players.

Also, many of the successful trades will be based on having better information than the market price (over time, it would be very difficult to have much success by being lucky, especially with multiple automatic systems active), the execution of those trades makes the market price more accurate.

Re:Profits, but for whom?

[Culture20]

But how does this kind of stock trading benefit anyone other than the traders themselves?

It doesn't other than inflating/deflating the perceived value of a company. It's a method to speed up the "productive citizens"->"traders/middlemen" transfer.

Re:Profits, but for whom?

[vertinox]

Traders make a profit on each trade. But the profit is always to the broker.

Depends on who your broker is and what kind of account you have with them.

A true blue day trader is going to have a setup for Direct Access Trading which isn't what you see on TV for those $9 dollar trades for the average Joe.

It requires you to have more than say $20,000 in the account and you must make a lot daily trades to be eligible, but the transaction fees are very low per trade so you won't be paying as much to your broker (like pennies on the dollar sometimes if volume is high enough).

Re:Profits, but for whom?

[quantumplacet]

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.

Re:Profits, but for whom?

[siloko]

I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved.

I realise I am likely to be charged with trolling [again!] but the stock market now seems to reflect the quality and quantity of ype not products and services. The market capitalisation of dot com companies in particular (AOL is wonderful example) is ridiculous when stacked against their profitability. Nuts and Bolts companies are dull, don't generate headlines and thus don't post great dividends for their shareholders as no-one even cares if they are making a regular profit. Stock markets seem now to be so detached from the reality of the profitability/financial viability of a company that watching the rise of shares to ascertain corporate health is foolish at best.

I wonder if theses 'algos' have some built in A.I. which parses the days headlines to see if sufficient vacuous hype has been generated to make an investment worthwhile . . .

Re:Profits, but for whom?

[Maxo-Texas]

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%?

Re:Profits, but for whom?

[TooMuchToDo]

Thought I'd chime in on this. I have a trading account with $150K+ in it, and my per transaction costs are extremely low (I trade futures though, YMMV when it comes to equities, commodities, etc). The provider I use exposes an API that I can interact against to directly execute trades (although, you're always going to be fighting the speed of light). I wrap around this API with Python and Postgresql. If you're smart and your algorithms are rock solid, you can do well (I don't have to work if I don't want to). On the other hand, you have to make sure a human is *always* in the loop somewhere, otherwise you end up with the United Airlines fiasco someone pointed out above.

Re:Profits, but for whom?

[EastCoastSurfer]

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.

Re:Profits, but for whom?

[SerpentMage]

>But how does this kind of stock trading benefit anyone other than the traders themselves?

How does any trading benefit anyone but the trader themselves? This high frequency trading issue is a moot point. There is nothing sinister about it. What bothers people is that a few are doing it and making oodles of money. I work in this industry and have worked at investment banks where you do high speed trading. But now I work at a hedge fund and we just avoid it. It is an arms race and what bothers people right now is that there is a break in technology capability.

I am not kidding here. I know for a fact a few houses have been able to get micro-second trades, whereas the rest of the industry is still dealing in milli-second trades. Thus what is happening is that some very very big houses are getting whalloped in a major way. Hence the sour grapes...

Re:Profits, but for whom?

[Anonymous Coward]

It goes like this. For a given security there are two prices the BID (what you're willing to pay for more of a stock) and the ASK (what you're willing to sell some of the stock you already have for). Most normal folks have only one up at any given time, you're either buying or selling. Then, if a BID equals an ASK you've got a trade.

There are entities in the market known as "market makers" who do both at the same time, however. They're usually not in the market to load up on a stock or unload their stock, so they try to balance the number of orders filled on a given security by raising their ask or dropping their bid in order to maintain equilibrium. Let's look at an example of an inefficient market without adequate liquidity. Let's say there's only one market maker -- he might bid $1.00 but ask $10.00, and clean up on anyone who tries to do business in his market.

So my hypothetical firm sees this huge gap and says, "Sweet. Let's start making market in here as well!" -- and I pad my bid a little bit, say $1.05 and shave a bit off the ask, call it $9.95. All of a sudden the original market maker is cut out - none of their bids end up buying stock, none of their asks end up selling it. So they decide to close the gap even further. 1.10 and 9.90. My firm doesn't like getting cut out of this sweet action so we close the gasp further and you have an arms race towards price discovery where the gap between the bid and the ask are separated by a very narrow margin, constantly being adjusted by what actual demand for the security is like.

Having multiple folks providing liquidity in the market means when you decide you're going to load up on STCK because you think their new product launch is going to do good things for the company your orders are unlikely to drive up the price very much so you can enter the position without paying a big premium to do so. Likewise, a year later you decide you're satisfied with your profits and are ready to exit the position. In a market without this liquidity selling your stock would drive down the price further and cut into your profits on that side.

Efficient price discovery is the purpose of the market. Liquidity is essential to that end. Traders provide that liquidity and, overall, the market benefits because of it.

Re:Profits, but for whom?

[cayenne8]

"But how does this kind of stock trading benefit anyone other than the traders themselves?"

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.

Re:Profits, but for whom?

[JPLemme]

You're confusing volatility with market liquidity. A market that's very liquid has lots of trades, so the value of a security (i.e. the most recent sale price) is always known and up-to-date. It doesn't have to be a volatile market to be liquid. For example, the market for government securities is very liquid, but if interest rates are stable it's also very non-volatile. (And even when it's "volatile" it's not volatile like a tech stock.) Needless to say an asset in a liquid market is typically easy to sell and convert into cash, which is the other definition of liquid.

The housing market is non-liquid. There have been only a half-dozen houses sold in my neighborhood over the last three years, and none of those houses is quite like mine. So nobody knows exactly what my house is worth. "Appraisers" are just professional educated guessers, who try to use judgment and experience to replace the pricing information provided by a liquid market. And as we've seen, a non-liquid market can be very volatile. Also, a house is a non-liquid asset; even a simple house sale to a family member takes weeks and hundreds of dollars to arrange.

But there are some securities (private placements, for one example) that trade very rarely. There actually are appraisers for these types of securities, because with so little trading activity the market price can become stale. These are very non-liquid markets. But as long as you can find a buyer and are willing to accept the buyers price they're no less liquid than IBM stock. You sell them, the trade clears, you get cash the next day. So they're liquid assets (more liquid than a house, in any case). And it's not even meaningful to talk about volatility in these markets because there is so little trade activity.

Re:Profits, but for whom?

[Maxo-Texas]

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.

Re:Profits, but for whom?

[phoenix321]

You can't cheat an honest man.

If you could make an easy living simply trading stock, everyone would do it. Really, the stock market would be full of people trying to make a quick buck out of nothing. And half of them go broke while the other thrives. The stock market is at worst a lottery or pyramid scheme, but it doesn't bankrupt poor hard working joes if they're working for honest and truthful companies. Or companies that are too small to survive on the publc trade floor.

But other than that, do you think anyone can tell the "real" value from the "perceived" value of anything as comples as a publicly traded enterprise? If the real and perceived values differed, who would NOT cash in on the margin?

Re:Profits, but for whom?

[omnichad]

That's the problem with the stock market in general. Stable profit to the company means 0 gain for shareholders. The only way a stock is valuable is for the company to take risks and get bigger and bigger and bigger every year.

Re:Profits, but for whom?

[S7urm]

NO

You "avoid" the bailouts, and you drown the 98% with the upper 2%'s greed.

They did the right thing, the government prevented large companies from destroying Main St. and they also opened EVERYONE's eyes to the fact that corporations nearly took everything from everyone.

Re:Profits, but for whom?

[Anonymous Coward]

Maybe he's someone who thinks for himself, and who doesn't toe anyone else's party line, at least not without an explanation of the reasoning and utility behind it.

Re:Profits, but for whom?

[Phisbut]

Ultra fast trading is an interesting idea and done right it can lead to successful short term returns

Ultra fast trading might be an interesting idea, but making a whole lot of profit trading stock because you have access to some information before it is made public (even if just 30 milliseconds before it is made public), isn't that a form of insider trading?

The only reason those ultra-fast traders make that much money is because they have access to information before every one else, before it is made public. I don't see how that can be legal.

Re:Profits, but for whom?

[Anonymous Coward]

We did trading similar to this a few years ago, though we used a simple, pure-arbitrage strategy. We were trading the morning of 9/11 (pre market-open - the market never opened that day), and didn't pull the plug when the news hit. We were actually testing feasibility, and had not yet installed our server in a rack in Manhattan. My partner was trading (actually, "overseeing" is a better term) in a day-trading room about 30 miles N of NY. (Later we moved our server to the same building as the Island ECN, which at the time owned the ITCH technology mentioned in the article.). Everyone in the room stopped trading, their jaws dropped, staring at the monitor in the corner. BTW, the consensus in that room that day was that the market was not going to re-open. EVER.

My partner, though, is sitting in the back of the room, trading away (or, watching the computer trade away), wearing headphones, which already had the other guys suspicious. (The headphones didn't have soothing music, but vocalized order flow information - it was too fast to keep up with visually. My partner did have to intervene when things went awry, and the headphones told him when he needed to act or if things were humming along nicely.)

I figured later that we did about 5% of the pre-market NASDAQ trades that morning.

This gave me some consternation for some time. We made a bundle that morning, and the subsequent increased market volatility was the start of a winning streak. We did thousands of trades a day, and simply did not have losing days. Was there a purpose or value to our trading?

I eventually concluded "yes". We provided market liquidity when it was sorely lacking. The people who sold to us at, say, .50 outside of the market would have sold to somebody else at $1.00 outside of the market had we not been there as a counter-party. We stood there catching hot knives and handing them off, while providing the benefit of a quick and certain sale. This helped reduce spread and volatility.

Indeed, over the next couple of years, our typical profit/share shrunk from .10-.50 to 1-2 pennies, and competitors entered the market and the war of technological escalation started.

Now, as for the "flash orders", which apparently started last year, I don't see the benefit of that to the market. It just front-running in exchange for a fee paid for the privilege.

Re:Profits, but for whom?

[anwaya]

This is not what happens. Such corporations don't simply "disappear", their assets and personnel persist, and are snapped up at a steep discount by other, similar corporations which haven't collapsed yet. These asset strippers leave the debts: the creditors and the creditor's shareholders have to write them off, creating losses that can wipe them out too.

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.

Re:Profits, but for whom?

[tmosley]

It doesn't. Indeed, it is probably fraudulent, as Goldman Sachs has insider information via their better connections to the trading floor than are available to anyone else. Basically, this program takes advantage of the several microsecond delay everyone else is subjected to in order to do insider trading. This doesn't mention the fact that they have access to limit order data that SHOULD be secret, meaning that they know how many shares and when to sell to force down markets, when and where to buy back in such that those billions of trades make them a vast amount of money. It's straight up market manipulation, both at the scale of microseconds in the former case, and even up to weeks or months in the latter.

Re:Profits, but for whom?

[vertinox]

When are we going to stop all this behavior by 2% of the population which is hurting the other 98%?

When you vote them out of office. That's when.

Re:Profits, but for whom?

[cayenne8]

"Thought I'd chime in on this. I have a trading account with $150K+ in it, and my per transaction costs are extremely low (I trade futures though, YMMV when it comes to equities, commodities, etc). The provider I use exposes an API that I can interact against to directly execute trades (although, you're always going to be fighting the speed of light). I wrap around this API with Python and Postgresql. If you're smart and your algorithms are rock solid, you can do well (I don't have to work if I don't want to). On the other hand, you have to make sure a human is *always* in the loop somewhere, otherwise you end up with the United Airlines fiasco someone pointed out above."

Do you have any links, books you could recommend to someone that would like to learn about and start investing in the market on their own...outside the normal 410K route?

Re:Profits, but for whom?

[ukyoCE]

And where would all of the employees who work for those companies be working, in this hypothetical scenario?

And how are all of the other companies in the US going to stay in business and avoid layoffs themselves if all of those other people are now out of work and unable to purchase goods and services?

I think you have an extremely unrealistic view of how fast the market can rebound to several large companies going out of business and laying off that many employees.

Re:Profits, but for whom?

[Maxo-Texas]

That's a fair point.

But why would you lay of 6,000 people and then give $100,000,000 to one person?

I'm sure $5,000,000 would have done just as well. Until the very late 1980's, $1,000,000 in today's dollars would have done just as well.

We are grossly overpaying people at the top.

---

However, I know at one company I used to work for, it made a profit every year-- it was bought and everyone was laid off.
The larger company took the customer list-- and lost over 80% of the customers since there was reason most of them were not with the larger company to begin with.

It was a waste of the larger companies money, destroyed 260 people's lives (some had been there 20 years), destroyed a profitable venture (It made about a million dollars a year profit after all expenses for whoever owned it). I don't know but I bet the larger company CEO got a big fat bonus for making such a boneheaded move (they basically pissed away 23 million dollars for a 200,000 a year in net profits).

---

But yea, inefficient companies do have to go out of business. Non-productive workers do need to be laid off.

OTH, when a corporation is providing no net benefit to a population- why allow it to stay in business?

Re:Profits, but for whom?

[adpads]

The typical justification for this type of trading is that it "eliminates market inefficiencies." But the problem is that these kinds of short-termist hedge fund strategies work by exploiting price volatilities, so they actually thrive on, and need, volatility in the market. There are some times when it can actually magnify them, creating price bubbles, etc. When large volumes are traded through quant strategies like this it's easy to see how that could happen. Some box says 'buy' because prices rise a millionth of a click; then a million shares are bought, driving the price up further. Other traders who follow the really fast quant traders follow suit, and then you have a price bubble.

Re:Profits, but for whom?

[burnin1965]

the ability to do things like this makes pricing of shares more efficient to the actual value of the market (increasing the price of undervalued stocks and decreasing the price of overvalued stocks) and making money flow rather than stay stagnant.

What you are describing is the market before these high frequency trading systems were developed. Everyone has access to the same information, they process it to make a decision on the current and projected value of a stock, and they place orders accordingly. Moving from the ancient floor and telephones to an electronic system with internet brokers increased the speed of the system and the number of players. And these high frequency trading systems do the same thing, but they do something else as well.

1) They use speed and volume to muscle in on traders who have performed their analysis and placed their orders and take a portion of the profits the slower traders may have acquired through their analysis and order. They didn't add liquidity, efficiency or even set the market price, they are simply stepping in between the buyers and sellers and creating multiple unnecessary trades to ensure a portion of the profits from those trades end up in their pockets.

2) And the systems are used to manipulate the pricing of stocks by placing fake orders that are removed before the orders can be acted upon because there was no intent to buy or sell in the first place, just to put some numbers on a board to force a reaction.

What it comes down to is you have a small group that have created a shadow market of orders that most traders never see and the use of systems to place and remove bogus orders on the real market to manipulate prices. I have watched NASDAQ level 2 quotes over the years and it has reached the point where today they are meaningless as the orders you think you see are not a reflection of the true orders hiding in the shadows and you can watch massive blocks of orders appear and vanish for no obvious reason as the stock price changes. In fact, I swear you can sometimes see orders flying back and forth as the high frequency trade systems of competitors wage a cyber trading battle on the open market. NASDAQ is actually paid to provide access to that information and it sure looks like its just a scam at this point.

Re:Profits, but for whom?

[JumpDrive]

20 years, man you're a real optimist.
I give it no more than 2.
Basically I haven't seen anything that caused a restructuring of the way the financial industry does business, which is basically allowing them to build another bubble with the bailouts. In the next year or so we are going to find out nothings changed except more people are out of work. This time it's going to lead to a complete total lack of confidence in the government to do anything about it and absolute loss of confidence not just in the people running the financial industry, but in the industry itself.
There are a lot of people who believe that the market is based on good management and productivity of a company, when in reality a lot of these companies are propped up by marketing (product marketing, marketing of future expectations, pipe dreams ...). And basically the real value is much less than current market.
------example---
Someone buys a computer 4GB of RAM , 2 hard drives, 26" LCD, 3GHz processor. $1100
But really all they need is something to read emails. A setup for that can cost less than $300
So the actual value of that computer to a company is $300, but because of marketing they went and bought a $1100 computer.
This is a micro example. ------
Now apply this to a company who says their net is $24 billion. So are they actually producing $24 billion of worth. No because they sold $12 million of computers which really weren't needed and the actual end worth is $3million. So if you actually look at what their net worth of their end products is , it's actually only $15 million.
So now apply this industry wide. Most of you have been there and know how much is being wasted.

So a lot of the economy is still being propped up by marketing. And I'm not talking about just companies marketing, there are wall street financial interest and lobbiest, which are continuing a false economy.

But then again there is no telling how long a false economy can continue. Look at the number of tax attorney and accountants who would loose their jobs overnight if we went to a flat tax or a taxing scheme which was much less complicated.

Re:Profits, but for whom?

[Phisbut]

No. They make money by taking advantage of public information and trading BEFORE other people act on that public information.

There is a short time window between the time of disclosure of public information and when people start to act on that disclosed information.

No, it actually all happens before the information is public. Here's some info from the article you didn't read :

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations
allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

(Emphasis mine). So they act upon the information they got before every one else.

Re:Profits, but for whom?

[tekrat]

And how exactly, would you have stopped the bailouts?

The government works for those corporations, most of the people who made those decisions were former CEOs of those same comapanies. Notice how Bush's henchmen, who started the whole "bailout" thing, were former Goldman Sachs people? And which company benefitted from the others going under? Goldman Sachs.

Oddly enough, those on Slashdot who scream about the 2nd amendment, never took up their guns and killed Congress and the President when they should have. Our country was stolen from under our noses, and the 2nd amendment people were too worried about Obama and his funny name or that he might "take away their guns" to notice that the very purpose for which there even is a 2nd amendment, was pushed out in front of them, and they didn't do shit.

Re:Profits, but for whom?

[b4upoo]

In the US trading done by an automated computer program is illegal. Whether it should be or not I do not know. But apparently drastic market sways were once caused when computers used certain software to control sale and purchases. In order to drop the amplitude and frequency of those sways automated trading was deemed illegal.
                      Probably the real world effect of such a law is simply that the big firms must follow the law whereas individuals would probably never be noticed. But with this high speed trading even the little guys might stick out like a soar thumb.

Re:Profits, but for whom?

[burnin1965]

When are we going to stop all this behaviour by 2% of the population which is hurting the other 98%?

Don't wait for "we", its up to you.

The people who are actually the means of production generating the wealth need to stop over paying the 2% for the products the 98% produced and the 98% need to stop working for wages that are well below what their production is worth to pay the 2%'s wages that are well above what they actually produce.

Easier said than done but it can be done with a lot of pain, paying off debts, cutting expenses, building savings, quitting jobs, refusing employment offers, starting personal businesses, etc.

The only way to stop the 2% is to cut off their supply of revenue and production.

Re:Profits, but for whom?

[ukyoCE]

I'm no fan of executive pay and bonuses, but HYPOTHETICALLY, that guy getting 100 million could be getting 90 million at the bank next door, and would jump ship if he was not adequately compensated.

These are extremes, but so is the reality of the payscales at these (huge) firms. Let's say these 2 firms, instead of being banks, are firms that deal in rocket science (to use a cliche). There are only 3 people in the entire world who know this particular rocket science.

So Bob with the 100 million bonus is legitimately necessary to that business operating. Your choices are to lose him and EVERYONE at the company loses their job, or you fire as many low-wage workers as necessary or possible to keep him.

HOWEVER, I don't agree at all that this rocket science scenario is legitimate. Nothing is really that hard.

It was a waste of the larger companies money,

Agreed - so how can companies get away with wasting so much money? The problem is massive consolidation in (most) US markets. When there are only 2 to 3 companies, or fewer, there is no competition. Prices are higher than they should be. Massive profits are raked in and handed to whoever happens to be at the top of the near-monopoly corporation. Capitalism cannot function successfully with such large companies.

If US regulators prevented such extreme consolidation, then there would be legitimate competition in both prices and wages. Bob the executive could not get a 100,000,000 bonus because the company would not have that much profit to overpay someone that much. Prices would come down on the products or services before the company would ever have that much profit.

This is exactly the problem in health care too. Would health care costs be so exorbitant if Blue Cross, Anthem, and so on were actually separate companies competing on prices and services? Of course not. That's the reason companies buy up competitors - it lets them offer worse service at a higher price, and their customers have no choice in the matter.

The only question is - why does the US government let companies do this? Of course the answer is - those businesses are the ones paying for the senators' and congressmen's campaigns. Customers and individuals have very little influence on what the US government does these days.

(sorry to go off on such a tanget :)

Re:Profits, but for whom?

[DavidTC]

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.

Re:Profits, but for whom?

[jollyreaper]

Can someone explain to me the benefit to society of this kind of activity? I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved, investing capital where it will produce goods/services/jobs, and so on. So despite being a social lefty, I'm not anti-capitalism or anti-stock-market; it has risks and flaws but it works. But how does this kind of stock trading benefit anyone other than the traders themselves?

The theoretical benefit of having a stock market is that it allows small amounts of capital from many people to be pooled into larger amounts to undertake business ventures. In private ventures between gentlemen, there wasn't much liquidity (ability to sell stock for cash in an emergency) so there was an understandable reticence to invest too much money in any given scheme. There's also the issue of liability and so forth and how the maximum risk borne by the investor could include his entire fortune.

So you get the idea of a corporation and the investor's maximum loss is the amount he invested. Put up $10k and it goes tits up, you're only out $10k. Of course, you try setting up a corporation or LLC yourself and get a bank loan and the bank is going to demand you sign a personal letter of credit thus you're back on the hook.

But let's say you have your corporation, it's not privately held but open for the public to buy shares. You still need the market. This provides a means for the investor to buy shares in your company and an ability to sell them for whatever reason when cash is required. The market for issuing new shares of stock is the primary market; the market for selling outstanding shares is the secondary market. So you feel comfortable buying $10k of Red Hat stock because you know if you ever need access to that money, you can liquidate your position. Your investment strategy would try and anticipate what your cash needs will be -- if you think you'll need it in six months, you're probably in commercial paper, if you need it sooner than that, you might just keep it in the bank.

All of what I've said above can be good and noble. The problem is that you can end up with people playing with the rules to rig the game. For starters, the stock market was never intended to be the domain of the average citizen. Wealthy individuals and bankers bought and sold stocks, not Joe Public. But Wall Street needs a constant stream of new suckers to take the losing side in bets and so companies started doing the whole 401k thing to get fresh streams of capital to fuck and despoil. And you get the game players who try all sorts of tricks to fuck people out of their positions. Let's also not forget that there are speculators, gamblers, and unsavory business criminals running their little cons.

It's the same basic human nature that ruins things like insurance. Insurance is a great idea -- you give up a portion of your money and in return you know your ass is covered if the worst possible thing happens. The idea is that only a handful of all the policy holders could suffer at any one time. If you were in an Amish community you could rely on barn raisings and the like and for a business this is the same idea. But then greedy fucks got involved. All the basic scams and cons that could be run against the industry were figured out hundreds of years ago. Buying insurance against something you did not own and did not have an interest in seeing preserved was outlawed by Parliament in what was it, 1790 something? But that's basically what the derivatives crisis is about and it's still legal in America to this day.

To get wealthy honestly can sometimes come quickly but for most it takes time and effort; to get wealthy quickly usually requires crime and if the crime isn't even against the law, so much the better. Note how the regulations put in place after the Great Depression were lobbied against and removed, thus paving the way for our current mess.

Re:Profits, but for whom?

[jamstar7]

In the US trading done by an automated computer program is illegal. Whether it should be or not I do not know. But apparently drastic market sways were once caused when computers used certain software to control sale and purchases. In order to drop the amplitude and frequency of those sways automated trading was deemed illegal.

Supposedly, yeah. But the big trading houses are doing this. There is no way a human can do millisecond trading.

Probably the real world effect of such a law is simply that the big firms must follow the law whereas individuals would probably never be noticed. But with this high speed trading even the little guys might stick out like a soar thumb.

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.

Re:Profits, but for whom?

[ultranova]

The stock market is at worst a lottery or pyramid scheme, but it doesn't bankrupt poor hard working joes if they're working for honest and truthful companies. Or companies that are too small to survive on the publc trade floor.

Except that those small companies operate in an environment dominated by large corporations, which most certainly will engage in all imaginable shenigans to increase their market value so the management gets to cash their stock options. When shit hits the fan, and these corrupt giants crash, the cascade effect will harm every company, and thus their employees.

Re:Profits, but for whom?

[rmgrotkierii]

And the market is ALWAYS hungry for more suckers. It's the only legal Ponzi scheme out there.

I think you are sadly mistaken. Incase you were wondering, FDR created the largest, legal Ponzi scheme ever - Social Security. :)

Re:Profits, but for whom?

[EastCoastSurfer]

Explain to me how not doing the bailout would have destroyed mainstreet? Oh, a bank fails? FDIC is there for that. Loans get harder to get? Happened anyways. Unemployment goes up? Happened too. The only thing the bailouts did was keep the rich guys who gambled and lost....still rich.

This also ignores the hundreds of small local and regional banks that are absolutely fine because they properly managed their risks.

Re:Profits, but for whom?

[JPLemme]

Volatility is essentially the "guessing what will happen" component of a price. The more the price is based on what people think will happen rather than on actual numbers, the more the price can whipsaw as people's opinions change.

Treasuries have low volatility because the prices are based on interest rates, inflation, and supply/demand. Those numbers change slowly and have a very predictable impact on prices.

Tech stocks have high volatility because the prices are based on things like market acceptance (will a new product be the next iPod or the next CueCat?), effectiveness (will the promising new drug work in people?), legal environment (will this new file-sharing service be made illegal to protect the RIAA?), and investor sentiment (will a lot of people want to jump on this bandwagon in a few months?). Since it's all based on guesses the prices can move as fast as people's opinions change, and the "plausible" range of prices becomes bigger, allowing for bigger swings.

Using housing prices as an example, it's easy to calculate mortgage interest, rent, taxes, insurance, etc. prior to buying a house. The market got crazy when we increased the demand for houses with lax lending policies, which pushed up prices, which attracted speculators, who started buying houses based on what they thought other people would pay for them rather than for what they were worth. The volatility (both the rise and the fall) was caused by lots of investors guessing everything would go up, followed by lots of investors guessing they would go down. The fundamental value of a house as a place to live or as rental property never changed much at all. (Which is why so many of the non-speculative fundamental home buyers just walked away from the market until the speculators went away, and are coming back into the market now.)

Re:Profits, but for whom?

[ultranova]

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?

There's a difference of scale between the everyday actions of average people and massive manipulation of stock market by rich traders. The actions I take, for example, will significally affect only me and a few other people, who are - and this is the important part - are capable of defending themselves from possible harmful effects, being of roughly equal power than me, or at least in the same order of magnitude.

On the other hand, as the ongoing recession shows, fucking around with huge economic assets to make a few dollars more can have a massive negative effect on lots of people who have absolutely no way whatsoever to defend themselves from the fallout. And even if they won't lose their job as companies collapse left and right, they still get to pay the bill of trying to keep what's left of the economy from collapsing further, and in time putting it back together - all the while knowing that the next bunch of businessmen is already getting ready to try their "clever" new methods.

Great power brings great responsibility. People who wield such power but refuse to consider anything except their personal profits are a menace to everyone else, and need to be stripped of enough of that power to no longer be a threat; otherwise you get Enrons. The common way of doing this is through regulating the ways in which power can be used. This is something libertarians, neoliberals and adherents of related ideologues have trouble understanding, presumably due to their failure to comprehend any form of compulsion besides outright violence as an exercise of power over anther.

Re:Profits, but for whom?

[powerlord]

Computing horsepower and software yes, Bandwidth in large part, but you're forgetting the critical piece in something like this.

Lower latency.

They pay ridiculous sums of money to colocate and get gateways on high bandwidth high speed/low latency networks for market data feeds and trading.

The smaller brokerage house (if such a thing exists), let alone the day trader/personal trader is so over matched just in terms of how quickly large houses have access to the data, even before you start figuring in things like semi-automated trading algorithms, in-house matching (match sellers and buyers in-house and pocket the exchange's commission for yourself), and the ability to have multiple worldwide feeds to pick from (oh, NY is slower by 3ms today? better switch to the London feed).

I'm amazed at what is going on in some of these companies.

Re:Profits, but for whom?

[KGBear]

I don't know what the original poster means, but I think I can relate. It's not that all actions have to benefit others; rather it's that some activities are only possible because of what society provides (such as a civilized context in which to trade, including police to make sure someone with a bigger gun doesn't steal your profits). Society provides these things because it gets in return something valuable: price discovery, a more-or-less fair way of allocating resources, jobs, goods, etc. However society needs to control the risks it exposes itself to or it will be obliterated by competing societies or mass-extinction. That's where regulation comes from and no matter how much traders dislike it I'm sure they are all glad for the regulations imposed on the chemical industry that prevent it from dumping carcinogenics in the reservoir their drinking water comes from.

It seems clear that societies should protect themselves and that means a constant evaluation of the risk/benefit of all activities made possible by the very existence of society. In this sense it is clear that the majority of the members of this society are now suffering because this society did very poorly at looking after itself in the last few years - by allowing the financial sector more freedom than it would have been wise. This attitude is identical to allowing our hypothetical chemical plant to dump poison in your reservoir. The deaths just happen in a more indirect way.

With all that in mind, it makes a lot of sense to ask if some kind of stock trading generates enough value that society should risk allowing it. I hope more people start asking that question.

Re:Profits, but for whom?

[dkleinsc]

You are laboring under the mistaken assumption that the elected officials are the sole cause of this mess. Give some credit to the executives who happily run the entire economy into the ground while reaping big bonuses.

Re:Profits, but for whom?

[commodoresloat]

If you're smart and your algorithms are rock solid, you can do well (I don't have to work if I don't want to).

Then why do they call you "TooMuchToDo"?

Re:Profits, but for whom?

[DeionXxX]

But unemployment went up by how much? It's a bit under 10% now... that's 4% over a normal economic period, who knows what it would've been if it wasn't for the bailout.

The money wasn't supposed to completely stop the recession, just lessen it's impact, so we can recover faster.

Re:Profits, but for whom?

[Burning1]

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?

It seems like a basic argument behind deregulation and a free market is that the free market makes the best use of people's self interest to benefit the common good.

When self interest starts harming the common good, it undermines the argument for a free market. As the harm done by self interest increases, it starts to support the idea that the public (our government) should step in to prevent an action that harms the common good.

A farmer selling food to a store, which sells to consumers is in the common good, and the individual self interest of everyone involved. A man breaking into houses late at night and stealing valuables is acting strongly in his own self interest, and not in the common good. These are black and white examples, but the GPs question is far from trivial, and far from black and white.

But, I think you missed the point... Not all actions have to benefit the common good. But, we should start asking questions when those actions harmed the common good. I have a hard time believing that millisecond trading added much value to the market. I doubt it created many jobs.

That 21 billion had to come from somewhere.

Re:Profits, but for whom?

[Maxo-Texas]

It's a bit under 10% as measured the new way created under clinton.

It's over 16% the way they measured it until then.
http://www.shadowstats.com/alternate_data

And it's over 20% if you include people who have run out of benefits and people who used to make six figure incomes who "have a job" for a fraction of their former pay.

These are really historic times... the banks are refusing to take ownership of houses that should be foreclosed on. The banks are refusing to list houses they have foreclosed on to artificially pump prices. Cities are tearing down thousands of houses rather than let them sink to their true price (which may actually be zero anyway since without a job, you can't pay anything for a house).

Re:Profits, but for whom?

[Maxo-Texas]

That's a problem.

Because about 20% of the voters are voting to slit their own throats because of the Abortion and Gay Marriage issue. As they start to lose everything they own- some-- a few percent actually voted against more "pro elite" (aka "my base"), "pro corporate" policies continuing under more republican leadership. They do this partially because the right finally got their crap together in the 80's and 90's and have a massive propaganda engine running that has people making $40k seriously believing some tax on people making $250k+ is going to affect them-- ever.

Basically, I'd rather be unemployed and give the wealth of my entire neighborhood to one person so I can shift the court towards overturning abortion and to put politicians in who will promote religion and fight gay marriage.

And it's a principled position so I can't knock it that much. I spoke to a democratic labor lawyer a couple years ago and he said the best thing for the democratic party would be to lose on the abortion issue- and I've felt the same way for quite a while.

I think it's a dumb position personally but I don't care either way about abortion or if a gay man and a gay woman want to get married.

Re:Profits, but for whom?

[jon3k]

"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?"

Entirely possible, latency becomes the big problem here, not bandwidth. Cheap DSL in the same city as the exchanges could easily outperform an Internet T3 across the country. That'ss why some brokers provision massive point to point optical circuits (think SDH/SONET) to POPs near Exchanges (or directly into them?).

Primarily Fiber Channel Networking

[Red4man]

Fiber Channel: It's gigabit speed, and very reliable once installed. The only thing to worry about is to make sure you're not bending the cables too far when you're installing the rack mounted gear - if you do - SNAP! - and you've destroyed the cable.

This is old news...

[larwe]

Latency issues have been an important factor for a long time. Here's an example article about some of the details:

Great future

[muyla]

In one or two decades we might be able to let all the stock trading to be done by the machines while we focus on doing the non-specialized work ourselfs! Ow wait... wasn't it supposed to go the other way around?

Re:Great future

[Nursie]

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?

Re:Great future

[Nursie]

The corporations are owned by investment funds which in invest money for investors. Everyone from you or me and out pensions up to the big fish with their hundreds of millions.

I'm not complaining that the evil corporations are hoarding the money away from the common man (man), I'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.

Re:Great future

[nelsonal]

Pensions and 401(k) plans largely. There's a huge amount of wealth in those. Ironically, the only pensions that act like they give a damn about what they own are the union plans.

You actually could have a life of comparative leisure relative to the past, but humanity spends huge amounts of time competing with status displays which have become vastly more important to personal happiness in the more "relaxed" world. If you're willing to live a 1950s lifestyle you should be able to have far more leisure time than the 1950s person. Remember though that you'll never leave your home country for travel, live in ~300 sq/person house, share a household immediately after college, and you would probably only own 3-4 suits of clothes.

Re:Great future

[maxume]

I don't follow "when traders trade in more than enough for everyone.".

And really, people worked far harder 150 years ago than they work today (farming using animal power is not easy), and I'm pretty sure the common man in the U.S. worked far harder 50 years ago than he does today (working in a factory is 'harder' work than sitting at a computer). People complain that they just can't get ahead, but people drive newer, bigger cars and live in bigger houses and eat better food and buy more crap and on and on, so just looking at the fact that families seemed to have switched from 1 income to 2 is not sufficient.

Re:Great future

[Attila Dimedici]

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).

Re:Great future

[bberens]

It's not really as much money as you'd think. Bill Gates was once worth about $100 Billion (according to the GP). If it were even feasible for him to cash that out and spread it amongst everyone in the US, that's only a little over $300 for each man woman and child. Also, if you were willing to accept the standards of living you had 30 years ago (one car per family, small house, probably no cable, no cell phones, health care available only at that time, no flat screens, no internet, etc.) you could probably easily afford retirement.

Re:Great future

[bberens]

You touched on something that scares me and doesn't seem to scare anyone else. The accepted P/E ratios in the stock market are very much supply and demand based. There's a lot of demand for shares because baby boomers are investing in their 401ks. When they massively pull out of the market, demand is going to drop significantly. We'll run into the same problem everyone is talking about with Social Security, but it's going to be our 401ks. In this way, the stock market also behaves like a ponzi scheme. Maybe someone wiser can set me straight on how that won't happen.

Re:Great future

[TheoMurpse]

Perhaps from an ever-widening gap between the rich and poor and a destruction of the middle class that is directly related to income taxes not being progressive enough?

As someone who has gone through law school and met a lot of people from wealthy families, I've learned that there are nearly sure-fire moneymaking schemes out there that only wealthy people can buy into. International arbitrage is where it's at. An interesting moneymaking pattern is this: The Indian government apparently currently is incentivizing power plant construction by guaranteeing an X% rate of return every year for Y years plus recoupment of complete investment costs. X is significantly higher than the investment plans available to the hoi polloi because the investor has to be willing to front the initial multimillion dollar investment of building the plant.

So wealthy people sink their $30M or whatever into building one of these and, provided the Indian government doesn't go tits up, the investors get ridiculous returns on their investment with little to no risk.

There are tons of other opportunities like this out there that wealthy families take advantage of on a regular basis. I've heard the stories and I know the involved parties. I just can't afford to participate because of the costs of entry.

I can just see it right now

[Anonymous Coward]

Stock Trader Just got a Headshot - $3000

SEC Official: I see you over there...

Stock Trader: I'm not hacking, I'm just lagging!

SEC Official: Turn them off, or I'm banning!

1588v2 aka Precision Time Protocol Version 2

[statusbar]

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++
 

Re:1588v2 aka Precision Time Protocol Version 2

[TubeSteak]

Anyways, back on the original question, no, network speed is not so crucial once all of your packets are properly timestamped.

RTFA:
One second after the market opened, shares of Broadcom started changing hands at $26.20.
...
While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
...
Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors' upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

On the one hand, you can call this 'perfect price discovery'
OTOH, that specific set of behaviors fundamentally breaks the traditional way that the imperfect markets have worked.
And just as importantly, it represents an unfair trading advantage that you or I will never have.
Allowing this behavior doesn't further market activities, it just allows a few players to accumulate wealth at everyone's expense.
Seems to me that the solution is to close the loophole that allows this to happen.

Re:1588v2 aka Precision Time Protocol Version 2

[31415926535897]

On the one hand, you can call this 'perfect price discovery'
OTOH, that specific set of behaviors fundamentally breaks the traditional way that the imperfect markets have worked.
And just as importantly, it represents an unfair trading advantage that you or I will never have.
Allowing this behavior doesn't further market activities, it just allows a few players to accumulate wealth at everyone's expense.
Seems to me that the solution is to close the loophole that allows this to happen.

As an investor (which is the term the article is using--among whom are you and I), you had better not be trading like these traders. These traders are Market Makers, which are specialized traders that provide liquidity (a very important thing) to the market. If you don't have real market makers, then the stock market is going to look like what Mortgage Backed Securities look like right now: there will be periods of time when nobody wants to touch the stuff, and if you are an investor, you are truly screwed if you need to buy or sell your security.

These market markets are looking to capture a spread (the cost to buy or sell)-which by the way is much better for the investor than 5, 10 or 20 years ago--capturing a fraction of a penny a billion times a day. The key component to a market maker's success or failure is understanding supply and demand. This was true even before the computers came in. The computers can only detect it much faster, so you get what you mentioned first--better price discovery. It's not that the investor is getting screwed out of 20 cents, it's that they're not getting the 20 cent discount they used to when the market makers were humans standing in the pits.

As an investor, you really shouldn't care if you get Broadcom at $26.20 or $26.40. Yeah, it's nice if you get it for the cheaper price, but the reason you're buying Broadcom is because you think it's a good investment, and if $0.20 ruins that investment for you, then I guarantee it's not a good investment.

The $0.20 might ruin a day-trader's day, but day-traders are not investors nor market makers. You and I are not day traders. The only thing the electronic market makers ("high-frequency traders") ruin are slower, human-based market makers' profits and day-trader's profits. It's certainly not worth an article in the New York Times.

winner-take-all competition

[WipeLeftShakeRight]

I interviewed at a millisecond (market-making) trading firm in Chicago. They claimed that when a hedge fund, etc. would buy or sell a stock, that one large purchase or sale would typically signal another. Whichever firm could get their quote up the fastest would make the buy or sale, and it's a winner-take-all system. The first market-maker to adjust their price would benefit. Thus, server speed is THE essential bottleneck. Needless to say, they keep the location of their server a secret.

Re:winner-take-all competition

[Sir_Real]

The location of their server no longer matters as GS was allowed to put a peeker in line between everyone else (on the planet) and the publicly traded ETNS. They get an opportunity to front run every transaction. Every single one. Zerohedge is a financial blog that has been keeping up with this story. Their coverage is good if a little breathless.

Link is to their "high frequency trading" tag:

http://zerohedge.blogspot.com/search/label/High%20Frequency%20Trading

Re:Free Market working A-OK

[wlj]

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" ...

Performance is a driving issue

[axafg00b]

A firm I worked with recently tore down an arbitrage network (they were getting out of the business as it was not core) which comprised of a great deal of Layer 2 dark fiber between sites in NYC and an external data center in NJ, Force 10 fabric switches with multiple paths to server clusters, and a great many Sun X-series servers running Linux. This arbitrage network bypassed the standard corporate (i.e. Cisco-based) network as they wanted exclusivity, higher bandwidth and as much speed as possible. Still, there were issues and the whole environment was scrapped since the actual returns did not match the expectations or cover the costs.

When I looked over the shoulders of the designers (they didn't want too much support from the regular network engineering team) they were concerned with raw performance and not as much with security or other daily operational issues. I would characterize it as the difference between, say, a NASCAR Sprint Cup car and your regular transportation. The former is purpose-built solely for performance while the other has to contend with safety requirements, daily functionality, and a lower common denominator for use.

Re:Performance is a driving issue

[mikael]

Most of the safety innovations for private cars came from the racing car industry - roll bar cages, seat belts, crumple zones, safety glass. Roll bar cages and crumple zones and safety glass have been into train carriages as well.

Re:Performance is a driving issue

[aclarke]

I would characterize it as the difference between, say, a NASCAR Sprint Cup car and your regular transportation. The former is purpose-built solely for performance while the other has to contend with safety requirements, daily functionality, and a lower common denominator for use.

So what you're saying is that the dark fibre packets could only turn left?

Allston Trading Has Spoken At My University

[Anonymous Coward]

Allston Trading occasionally speaks at my university, and they've said that network bandwidth can be a big bottleneck. They needed to install servers across the street from the NYSE to attain the edge they needed.

As far as who the profits go to, ALlston (and I suspect many similar organizations) keeps most of their profits internal, and exercise big profit-sharing programs for their employees. It's actually quite an interesting idea, as this group of almost entirely Computer Scientists are using their expertise to make some good money as a cell in an atmosphere dominated mostly by business-types.

Some info

[Haffner]

As someone who works with people who do this, I can tell you they spend a lot of money on very powerful machines, and then try to place said machines within walking distance of the exchange's computers. I have been told that running a server at the office is too slow, even if its in the same city. Also, millisecond is the wrong word. Their trading is measured more closely in microseconds.

Re:Some info

[niola]

Yeah from some of the stories I have been following on this, it seems some firms even co-locate their machines in the same room with the NYSE trade systems. I imagine that could be quite an advantage over other traders, especially when coupled with some extremely high performance program trade code like Goldman Sachs has been using.

http://www.reuters.com/article/fundsFundsNews/idUSN0518022220090705

FAZ and FAS funds

[vertinox]

This has been a common topic on the stocks news groups about FAZ and FAS using different methods because of inefficiency between the two funds.

They are support to inverses of each other (short and long) of the finacial markets with leverage, but a few people have noticed that during the first minute of trading they aren't exactly the same.

The basis of the what people are doing is complicated and usually involves buying both shares and dumping one in the first minute and then selling the other shortly thereafter.

But there are other methods people have talked about but I can't seem to find the newsgroups since they were buried in spam a month or so ago.

Re:Free Market working A-OK

[ShadowRangerRIT]

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.

not first

[Permutation Citizen]

I suppose that's the same guys that are always getting the "first post" on /.

A profitable subset of "algorithmic trading"

[GlobalEcho]

I work in the finance industry, and know a few things about this business. It can be very profitable indeed. Since the HF trades are typically finished at the end of each day (or even minute), they are not required to hold much cash (capital) to support their positions. Thus the business is unusual in the finance world for making a profit on, essentially, zero capital. Of course, it costs a lot of money to stay in the arms race.

The article hints at two kinds of HF strategies, and they really are distinct. First, there are the "rebate" strategies that collect those credits for providing markets. Then, there are the "predatory" strategies that try to find the price points of buyers and sellers as described. Other HF strategies include pairs trades (Exxon goes up so RIG will soon), inter-exchange arbitrage where a stock is traded on multiple exchanges, and index arbitrage such as trading the elements of the S&P 500 against the index futures (which has been around almost forever).

Other algorithmic trading includes strategies meant to take on positions slowly (or quickly) and efficiently. A famous old category are the Volume Weighted Average Price (VWAP) strategies that try to trade a little bit at a time throughout the day, so that the average trade price is close to the day's average. Other algos try to take advantage of mean reversion or trends during the day.

There is huge demand for technical people in this industry (I probably get one headhunter call every two weeks), almost all of it in NYC or Chicago. There's demand for network engineers, statisticians, programmers, and traders, and high pay for quality. Surprisingly few programmers these days are really acceptable to the business, because the code has to be so fast and efficient, and almost no one studies that any more.

The short answer

[sjvn]

Most exchanges aim for that kind of speed now, but fail to make it. Some of them, like the London Stock Exchange, http://blogs.computerworld.com/london_stock_exchange_to_abandon_failed_windows_platform, which made the idiotic mistake of relying on Windows Server and SQL Server, don't even come close to delivering that kind of performance.

For those that come closest, the servers tend to be transaction-optimized RHEL (Red Hat Enterprise Linux) and Solaris. The networks are fiber optic-based. While they may connect to the Internet, the core systems, like those provided by AboveNet, are usually private 10GBe networks. In short, to really take advantage of this kind of high-speed trading you're not going to be doing this from your basement. You need to have a trading station either co-located at the market, or just down the street on a high-speed network no more than a link or two from the exchange's servers.

And, yes, network speed does matter here. So does server, storage and DBMS access speed.

Needless to say, none of the exchanges are exactly forthcoming about what their particular magic technology formula is since being able to deliver high-speed trading consistently has become an important sales point. I know many traders on Wall St. and the City in London who will move from one Exchange to another based purely on their ability to deliver faster trades. For this group, what's being traded is besides the point. It's all about keeping an edge in trading speed over their competitors.

Steven

Re:Human reaction bottleneck

[Bender0x7D1]

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

That assumes there is still a human in the loop and not a computer doing trades autonomously. Within certain bounds, of course. But still autonomously.

Re:Human reaction bottleneck

[ShadowRangerRIT]

Humans don't make the purchases or sales. The algorithms trade on their own, all the humans do is define the mechanism to evaluate trades and set limits (to ensure a bug or an unusual market movement doesn't get out of control).

Re:meh

[Em Emalb]

No, the little guys still have hope, they can still make money, just maybe not quite as much as these "super-fast" traders.

(Disclaimer: I work for a financial firm. This isn't really news, as the market for these types of trades has been mature for a while now)

LOL, and now I get the "Slow down Cowboy" message. It appears slashdot does not believe in micro-second posting. ;-)

Speed is important

[LearningHard]

To a previous commenter. The companies doing high frequency trading "are" the brokers. They aren't paying any brokerage fees because they have direct access to the market. Additionally speed is important enough that your computers need to be at least in the same physical vicinity as the trading computers. Literally every millisecond makes a difference. One of the things explained in the article is because the computers are so fast they can issue and cancel an order before it gets fulfilled. So with the Intel example: Notice there is a large buying trend in Broadcom Issue at x and see if there is a match. When a match is found immediately cancel. Issue at x+1 and see if there is a match. When a match is found immediately cancel. Repeat until a match isn't found. Place a huge sell order at the final number a match was found. PROFIT Basically the company made a .4% profit in a few seconds on 1.8 million by doing nothing but taking advantage of proximity to the market. This runs against several of the ideas around how an exchange is supposed to work. By the way... if I remember the match correctly that small .4% profit? It becomes huge when you consider this is done every second of every day. All that money those big firms are sucking up are coming from the small investor. The question is what is there to do about it? It will kill any small time daytrader. Someone like me who buys and holds will be alright but man forget trying to trade minute by minute based on technicals.

Re:Human reaction bottleneck

[Drakkenmensch]

The algorithms trade on their own, all the humans do is define the mechanism to evaluate trades and set limits

Human arbitrary decisions applied blindly by a machine thousands of times per seconds. That sounds like a real winner to me.

An abuse of the free market system.

[Whatsisname]

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.

Re:An abuse of the free market system.

[Will Fisher]

You're wrong.

High frequency trading means that more trades happen in general. This extra competition to fill orders drives down the difference between the buy and sell prices and greatly reduces arbitrage situations (ie, the difference in price between the same stock listed on different exchanges and possibly in different currencies).

So, if you buy or sell a something, you're giving less money to the market-makers and you're getting a more "correct" price. It levels the playing field.

And it's true that arbitrage and hifi trading are a zero-sum game. That's why it's an arms-race at this point.

Re:An abuse of the free market system.

[vertinox]

And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.

Actually, the stock market is not a zero sum system.

When people and mutual funds lost all their 401K value (billions even) in 2008, no one actually got that money.

Not the hedge funds.
Not the short sellers.
Not the government.

It simply vanished.

Which is why had major deflation.

The issue is that the stockmarket doesn't make money like say the Federal Reserve prints it, but in a sense it basically saying how much it is valued by what people would theoretically pay for it.

So when you have a $1 share that turns into $10 a share, you didn't actually earn that money. It is all theoretical until you sell your shares.

Now if it was at $10 and everyone sold their shares at once, not everyone is going to get $10 because the market has to queue everyone up for sell and buy orders so that theoretical money will not actually be delivered to everyone and someone will get the short end of the stick.

So no... By them creating theoretical money does not one else loose money (except of course shareholders who didn't sell their shares when the stock collapsed)

Re:An abuse of the free market system.

[Luxemburg]

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.

A common and understandable misconception.

For the remainder of this comment, I choose shares in Google as an example. I have no position in Google, not an opinion on their current price.

Both arbitrage (making use of inconsistencies in the market) and speculation (trading for immediate short term profit, and not for long term investment) are activities that add value. It is important to understand that markets are not only there to facilitates exchanges (e.g. trading in securities), but they also play a vital role in information processing. The activity of trading feeds information into the world: If a person buys 1 share of Google for the price of x, this person is also saying "I am willing to put my money on the notion that 1 share of Google is at least x". The current price of Google is nothing else than the consensus opinion of all market participants.

The accuracy and efficiency of said consensus depends heavily on the tools available to the speculators and arbiters. Say I think that Google is currently overpriced. If the market rewards me for supplying this information, then I would do it. For instance, I could sell Google shares short (i.e. I would sell shares that I don't have, hoping to buy them later on at a lower price and thus make a profit). At the beginning of the financial crisis, a lot of governments disallowed trading short, naively expecting the market to stabilize. What actually happened ofcourse is that information exchange slowed down: if Google was indeed overpriced, this would be known much later to the world if short trading wasn't possible.

The bottom line: speculation and arbiters bring their information into the market and are rewarded for this by their profits. If the information is incorrect, they will be punished with a loss.

Re:An abuse of the free market system.

[jdev]

You're wrong.

High frequency trading is based on exploiting knowledge that isn't available to everyone. Its akin to insider trading and should be regulated.

Lets say that a company announces something that means big profits. Lots of people then place orders to buy. Due to a special agreement with NASDAQ or whoever, a high frequency trading program will see these orders getting ready to be placed and make their orders a fraction of a second before everybody else. So they get the stock for slightly cheaper and then sell it off quickly for a profit. They end up making money off the people that don't have access to high frequency trading. They don't make a lot off of each trade, but they make up for it in volume.

If this is allowed to continue, the markets will lose their credibility. Hopefully they will either self regulate or government intervention will take care of the problem.

Almost Front Running...

[nweaver]

Front Running is when the broker or market maker (eg, Nasdaq) does such behavior.

Although the high frequency trading is slightly different, it is almost electronic front-running, especially with the ability to PULL the orders unfufiled after a few milliseconds.

Bogus artilce by clueless arts graduate

[DCFC]

This is an outstandingly bogus article, what happens when arts graduates attempt to understand anything except celebrity gossip.

>It is the hot new thing on Wall Street,
The first algotrading I encountered was in the early 1990s at Deutsche, and they senior guys there told me of some of the mid80s stuff they'd done.
Not new.

>a way for a handful of traders to master the stock market,
Although algotrading is not exactly mass market, it is about as exclusive an activity as getting drunk.

>peek at investorsâ(TM) orders
That's not algotrading.

>and, critics say, even subtly manipulate share prices.
A major topic in algotrading is actually market impact modelling, ie working out how to make prices move less when they trade.

>Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency >trading is one answer.
Actually they're working out how to employ these guys since they've often been shafted by the GS bonus scheme.

>software that a federal prosecutor said could âoemanipulate markets in unfair waysâ â" it only added to the mystery.
He was fed this line by GS as part of a dispute over an algotrader's pay. There is no suggestion that GS was being "unfair", just addressing the issues caused by GS having an inferior tech infrastructure for AT than may competitors.

>"This is where all the money is getting made,â said William H. Donaldson".
I'd love to see the original quote before editing. Bet it was a lot less sexy.

>For most of Wall Streetâ(TM)s history, stock trading was fairly straightforward:
For an arts graduate the writer is terribly ignorant of history, as well as trading.
For instance is he not aware of how the Kennedy family got rich as part of causing the crash of 1929 ?

>Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. âoeMarkets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.â
It's more complex than that. Some ATs are consumers of liquidity, others provide it, and there exist models that imply that heavy AT activity drives liquidity away.

>Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive,
164% is a surprisingly "precise" figure, which PR bunny fed that to him ? Wonder why the PR wouldn't give more ?

>"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.
Edit/Delete Message

Re:Bogus artilce by clueless arts graduate

[amateur6]

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.

Re:Human reaction bottleneck

[ShadowRangerRIT]

Hey, as long as the limits are reasonable, there's nothing intrinsically wrong with it. Humans are pretty bad at picking stocks; all those rules our brains use to simplify decision making tend to muck up our ability to evaluate them accurately. The computers can be trained to evaluate based solely on those factors that are actually useful, and do it faster and more effectively than the human could. It sounds horrible the way you phrase it, but so many other applications we use computers for; we don't like the idea of machines supplanting humans in most fields.

Cancellation fees

[davidwr]

Canceling an order should be discouraged, in the form of a fee small enough to be merely annoying to someone who occasionally cancels an order, but costly enough to discourage routine cancellations.

It's frontrunning, not lag.

[Maxo-Texas]

GS sees both the buy order and the sell order.

They can sell before large sell orders. Then buy again after to avoid a loss.
They can buy before large buy orders. Then sell right after to take a gain.

It's called front running and it's illegal.

But the government is not enforcing the law.

My theory is they are letting illegal activity go on to hold up the market prices.

I could be paranoid. But I've been in this thing for 28 years now and I've never seen such goofy market behavior and repeated evidence of price manipulation at market close on thin volume-- and yet there are no investigations.

Chicago trading experience as a Sys Admin

[cexshun]

I was a Sys Admin for a day trading company in Chicago.

We had a 100mb serial line direct to all of the major markets that we traded in. We also traded the European markets. Trades were taking upwards of 300ms to complete. So, we spent $25mil USD to build a data center in Germany. We could then use Citrix to remote into this data center and trade, We still had traders that would scream for us when a trade took >100ms on the local markets. And we came running and scoured network logs trying to find the bottleneck.

We replicated all traffic to certain ports on the Cisco and had Wireshark running constantly, even after hours. Every millisecond counted. And seeing that the owner of the company personally made $3mil profit every quarter, it seemed to be working.

Welcome to 1992

[ajs]

We had a couple of mini-meltdowns of the market in the early 90s because of programmed trading that went haywire. Ever since, programmed trading and the arbitrage that comes from out-pacing the market by a few seconds (at first, and then a few tens of seconds and now milliseconds), there has been an ebb-and-flow that looks like this:

* Someone starts doing this (they think it's the next big thing)
* They run into problems, and accidentally make the news
* The news media is all shocked that this new thing is happening
* The company (or project) that started it either goes away or settles down and becomes a mature member of the programmed trading community.

The interesting story, and the one never covered is the nature of the mature community. They essentially have a shadow-stock market that hasn't fully been regulated, and which is literally invisible to most humans. Now, these companies are mostly very large and stable organizations that want to stay that way, so for the most part, they implement controls that are sane, but as we've seen over the past few years, systemic mistakes which have no obvious downside until they cause wide-spread failure are not typically regulated well from the inside (alas poor Lehman, I knew you).

However, we should be clear here: this arbitrage is very often not as valuable as you would think. It costs a lot of money to do and has fairly small margins of return. It makes money, but there are easier ways to make money in the market. On the other hand, it has the virtue of very high turn-over, which means you can throw a pretty sizable chunk of money at it. When you're a large investment firm saying "sizable chunk of money," you typically mean, "dang, they won't let me buy more than 10% of IBM in this fund."

Re:Welcome to 1992

[ajs]

Correction: I'm told I'm behind the times. The current advantage is in microseconds, not milliseconds.

Re:meh

[mcgrew]

They're gonna screw up before long...

Before long? It happened last fall; the Dow Jones lost half its value and now people are being laid off right and left, and states are going broke.

Of course, it wasn't just letting computers do stock trading, but the idea behind it was - short term selfish interest, lack of ethics (Bernard Madof was head of NASDAQ while he was bilking people with his ponzi scheme), and all around sociopathy and incompetence by business, political, and moral leaders.

The stock market isn't supposed to be a casino, it's supposed to be for long term investment.

Those who refuse to learn from history are doomed to repeat it.

It was true that the worst of the panic was past. But not the worst prices. There was too much forced liquidation still to come as brokers' accounts were gradually straightened out, as banks called for more collateral, and terror was renewed. The next week, in a series of short sessions, the tide of prices receded once more -- until at last on November 13th the bottom prices for the year 1929 were reached. Beside the figures hung up in the sunny days of September they made a tragic showing:

[Chapter 13 page 4 has a table of high and low prices that gets screwed up copyinig and pasting]

The New York Times averages for fifty leading stocks had been almost cut in half, failing from a high of 311.90 in September to a low of 164.43 on November 13th; and the Times averages for twenty-five leading industrials had fared still worse, diving from 469.49 to 220.95.

The Big Bull Market was dead. Billions of dollars' worth of profits-and paper profits-had disappeared. The grocer, the window-cleaner, and the seamstress had lost their capital. In every town there were families which had suddenly dropped 'from showy affluence into debt. Investors who had dreamed of retiring to live on their fortunes now found themselves back once more at the very beginning of the long road to riches. Day by day the newspapers printed the grim reports of suicides.

The very same problems that caused the Great Depression (including land speculation and underregulation) caused our present economic meltdown.

Microseconds, not Milliseconds

[miller60]

Automated trading has been a growth engine for data center colo providers, who market "proximity hosting" space within their facilities to hedge funds who believe that they can get an edge by being physically closer to the exchange's servers than their trading rivals. In other words, once you max out the wire speed, it's about physical distance. Savvis says its ultra-low latency offerings can reduce connection speed to microseconds, rather than milliseconds. The NYSE's data center expansion purportedly will enable it to offer colo space to low latency trading operations.

This is what the guillotine was for.

[Colin Smith]

Sometimes you have to remind people that *everyone* is touchable.

Re:Human reaction bottleneck

[Monkeedude1212]

When you program a computer to have a "Gut Instinct" I'll support autonomous functions fully. Until then...

I'm investing in this new company called "Woozywuzzles"

Re:a solution:

[omnichad]

Absolutely. Even making it 5 seconds would put most of the globe on the same level field.

Re:Some figures, circa-2003

[SerpentMage]

When I talk micro-seconds I am talking complete turnarounds in micro-seconds.

These days exchanges are offering inplace hosting. Thus you are connected with fibre to the exchange. Not cheap! For those exchanges that don't offer hosting the big boys lease buildings RIGHT BESIDE the exchange.

What seems to be the vogue today is probabilistic turn arounds. In other words you don't actually wait for the data or the turn around you just throw out orders and then keep a lagging system that tracks your error. This has actually sped things up quite a bit.

But like you said "this will take the biggest iron you can throw at it" and it seems right now there are many very big boys who are falling massively behind the curve. This is a game that only boys like Goldman's can support since the hardware and environment is not trivial. But then again I don't think I need to tell you that.

With every winner, there is a loser.

[Anonymous Coward]

Yes, no questions were answered.

"high-frequency traders generated about $21 billion in profits last year"

Many of those trades took money from the guy who comes home at night and trades for his 401K. With every winner in the stock market, there is a loser, and it is big banks like Goldman Sachs that are usually winners.

I suspect that talking about "market liquidity" is just avoiding the issue: The U.S. financial system is corrupt.

Only Affects Technical Trading

[knapper_tech]

Whenever a stock is in the soft parts of the price elasticity curve, sensitivity to fundamentals is low and the trading can be manipulated by applying the correct trades at the correct technical points. The method involves representing all traders and trading accounts as one aggregate trader with an average propensity to respond to technical signals and then using this theoretical trader as a model to predict which trading contention points will be most influential on the developing technical pattern. If a stock is trading well within its plausible valuation range, this technical response sensitivity is the dominant mechanism driving new trades. You can draw the stock market as a control function and solve for the type of feedback necessary to induce the desired trading pattern. Engineers who do analysis of oscillations of mechanical or electrical systems will understand this readily.

Whenever a stock is deep on either side of the price elasticity curve, the influence of fundamental traders will present too much of a "noise" signal for technical manipulation to be effective. I'm writing up a on this subject here.

Re:Explanation must agree with the facts.

[caerwyn]

Rapid day-trading has very little effect on long-term-held investments. One is looking at long term trends; one is exploiting intraday volatility. They're not mutually exclusive. It's very possible to make money from repeatedly shorting a stock that's still going up over the long term.

These rapid-traders are mostly playing a game against each other, not against long-term investors.

Re:Explanation must agree with the facts.

[caerwyn]

Not really. There's a *very* large pool of regular investors and smaller houses that are trying the day-trading thing, and that's the group that's losing out to automated sub-millisecond trading. Day trading is *dangerous*, and better than half of the people who try lose a lot of money to it.

This is why there are rules about how much money you have to keep in reserve if you get classified as a day trader, to try to keep people from seeing their entire life savings vanish. Currently, day-trade flagged accounts have to keep at least 25k in the account.

For most long-term investors, the rapid trading really has very little effect, because they're not really playing the same game, so they're not the ones paying such a price.