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How To Profit From Planetary-Scale Computing
An anonymous reader writes "MIT physicist Alex Wissner-Gross and mathematician Cameron Freer have devised a technique for exploiting geographic location in high-frequency trading, reports FastCompany. From the article: 'We view this work as one of the first serious, credible justifications for covering the planet's surface with computers. [...] We've perhaps identified a new type of natural resources that sovereignties might take advantage of.' Physicist and hedge-fund manager Jean-Philippe Bouchaud says, 'This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.'"
Due to geographical locality!!!!!
'This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.'
Limits? Only if we stack them one computer high. If we start piling them up - especially those little mac Mini's - we'll exceed these perceived limits in no time.
Now if you'll excuse me I have to go invest in companies that sell outdoor extension cords for electronic trading workstations.
So, just when you thought HFT couldn't get any worse of a rep, now its going to turn our world into a dystopian matrix/terminator/cleopatra2525 place.
At least there's a chance of hot babes in leather and armored bikinis though! That's gotta count for something.
When information is power, privacy is freedom.
FFS why does every article that mentions Siberia always have a picture of snow? I lived there for 6 months and sure, in Winter it was -40 at night, but in the middle of Summer it was almost +40 celsius. It probably pisses me off almost as much as when people use a backwards facing latin R in order to be cutesy when writing English words in a pseudo Russian manner.
Or the fact that every story that mentions Penguins also has to show icebergs,
/rant
Yeah go on, mod me as an off-topic troll, but it doesn't change all the overused, bad and incorrect stereotypes
I am Slashdot. Are you Slashdot as well?
This doesn't create any value for anyone.
And to what extent is this latest proposal, while apparently to do with the distance between exchanges, also actually about putting resources into jurisdictions which have perhaps more elastic definitions of what constitutes legal trading?
On previous form, this will probably get moderated troll or flamebait. But it's actually two questions that I have never had adequately answered, except for the usual "you wouldn't understand" from the traders. If I, a graduate systems developer with further education in economics, can't understand them, what's the betting that our elected representatives can?
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
Some of the more involved trading strategies exploit price fluctuations between separate exchanges: traders construct complex automated financial instruments designed to seek out and exploit price differences between a range of different shares or commodities on these exchanges. The uncertainty of price movements means that individual transactions cannot guarantee a profit, but firms can make steady profits by making millions of transactions each day.
Maybe we should be exploring cheaper ways to create market liquidity without allowing firms to siphon off profits through pure arbitrage.
[Fuck Beta]
o0t!
hmm covering the planet's surface with computers...
*turns around looking for electromagnetic discharges and robots from the future*
I think it has been well documented that planet-scale computing leads to disaster. I for one don't want to be destroyed by the Vogons just before the computer produces its answer...
"It takes considerable knowledge just to realize the extent of your own ignorance." - Thomas Sowell
I would say anyone knowledgeable and not directly benefiting from HFT would rather take this as a serious, credible justification to ban this tax on serious, honest investors.
But Wallstreet's buddies in Washington will make sure this won't happen until another flash crash takes the DOW pinning for the Fjords.
Hope you voted for change and hope, lulz.
You're thinking too two-dimensionally. Think carefully: what location minimizes the average distance to every spot on the Earth's surface? I'll tell you right now it's not in Siberia! But you should probably spend some extra money on the air conditioning system for your server farm if you want to set up shop there.
HFT is done by the greediest scum of the earth. It is an approach that is highly instable and can do tremendous damage. It is high time this practice is outlawed. Considering that fast stock trading does not produce anything, but only serves to shuffle money around, tolerating such a destabilization risk is completely unacceptable.
Personally, I would add a mandatory random delay in the 15-30 minute range to each stock transaction. Or maybe even a few hours. This would curb speculation, while at the same time beneficial effects, like a company getting money to invest from an IPO would still work.
Most ACs are not even worth the keystrokes to insult them. Be generically insulted by this and ignored otherwise.
This technqiue wont work with orders processed in dark pools. And as the trends are showing larger and larger proportions of ADV are being done in dark pools. I would think gaming dark-pools would be the primary objective and not going after some boring 80s movie plot.... (Can anyone remember "Fair Game" with Cindy Crawford).
Arash Partow's Philosophy: Be a person who knows what they don't know, and not a person who doesn't know.
This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.
Not yet, not until the Vile Offspring are born, and consume their parents...
it got destroyed just 5 minutes before the question was computed.
God dammit! I'm pissed off again.. I'm pissed off because everyone wants to 'study' HFT or 'discuss' HFT.. and no one seems to understand the big picture! HFT is ruining the fucking stock market. HFT is destroying the opportunities for the middle class.. destroying their retirements.. and ruining the confidence in the market. HFT is making the criminally rich even richer! Everyone likes to talk about HFT and bitch about it - and the people that benefit most from total stupidity that is HFT are the ones that get to enact the policy through lobbying and backroom revolving-door politics.
HFT does one thing... It exploits the gaps in bid and ask price during execution to make money off the actual market orders. But, if the market is no longer correctly offering 'market' prices because of instantly-changing outside influences, how the fuck is it still a market and not a scam? The only people saying HFT is a good thing are the people benefiting from HFT.
There's tons of easy ways to fix the problems created by HFT exploiting.. Here's a few ideas:
1. random delay.. Issue an 'instantaneous' delay in ALL trade execution from all firms. In essence.. make the delay long enough to completely ruin HFT but short enough that no human executing a trade would ever be affected.
2. trading tax.. Tax all trades by a negligible amount. Firms that actually invest will not be affected.
IMO, this article is yet another example of solutions for a problem by exacerbating the problem.. So, fuck you, MIT physicist Alex Wissner-Gross and mathematician Cameron Freer.
--- We need more Ron Paul!
If they aren't front running their trades by putting up orders they have no intention of filling then what's the problem?
They're buying something in one place that they believe will grow in value at another place. Isn't this the goal of all trade?
Step 1: get all the people responsible for HFT to move to a base at the bottom of the ocean.
Step 2: turn off the oxygen.
Step 3: Celebrate, then start thinking of how to get all the lawyers to move to Siberia as well.
It sickens me that people everywhere think that the ability to exploit something for personal profit is a credible justification for anything.
Financial exchanges should have a "10-second" fairness rule on public trades:
* If the trade does not have an imposed deadline on it then each up-bid delays the trade by 10 seconds and no "high bid" can be withdrawn for 20 seconds, giving the seller two full waiting periods to accept what may be the winning bid.
* If the trade must be executed by a certain time, bidding UP ends 10 seconds before but anyone is free to match the bid up until the clock runs out, at which the trade is assigned by lot or divvied up among the bidders in a way that is "fair" but which gives the first high bid a slightly better opportunity to buy as a reward for not stalling. Bids would also have a 20-second "lock in" period so those made near the end couldn't be withdrawn before the seller had a chance to accept them. If you make your bid, you are stuck with the results.
* Trading houses would have the option to stay open past the closing bell for individual trades that were in the process of being bidded up - that is, those who had a new bid in the last 10 seconds. This is to allow trading-houses to not turn their closing bell into an artificially imposed a deadline on a trade when the seller doesn't impose one.
This would all but eliminate the advantage of high-frequency trading. True, there would be a minor advantage for people who made the "high bid" exactly 10 seconds before the deadline under this scheme, but those matching the bid wouldn't fare much worse.
10 seconds is a straw number - the real number should be high enough so that ultra-fast-trading isn't an issue, but not higher. Realistically, that's probably more like a few seconds or less for stocks traded on only one exchange, longer for stocks traded on multiple exchanges.
I'm sure there are problems with this that I haven't thought about but it would solve the problem of fairness for those who aren't able to execute super-fast trades.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
So basically humankind does not have enough problem to solve? We really need to create incredible complicated games to keep our computer busy?
The thing is, arbitrage doesn't create liquidity, it simply capitalizes on the mistakes other people make.
Generally speaking arbitrage depends on the existence of liquidity (the ability to sell an asset without greatly moving the price) in order to work. It's impossible to capitalize on a "mis-priced" asset if there is no market for that asset. That doesn't mean however that arbitrage is without value. Price convergence is a common result of arbitrage and it tends to reduce price discrimination.
In a certain sense, all business is an exercise in statistical arbitrage - exploiting the difference in prices between two or more markets. You buy goods where they are cheap (possibly assembling them) and sell them where they are dear. Without the ability to exploit price spreads profit is impossible. If someone makes a "mistake" in pricing, we should expect someone to step in to take advantage of that mistake.
This is something that has a very high potential to cause a real problem in the markets... and already has several times, they just weren't high enough profile to get the publics attention. But if they really bring down the markets for a day, or cause some sort of crash that impacts the average persons 401k or pension, governments all over the world will be happy to jump on the "Rich people are the bad guys" bandwagon and outlaw this sort of thing outright. Simple laws like, you must own a stock for a minimum of 4hrs before selling it, would end this kind of trading over night.
Uhh... it doesn't seem like a very good one. If there is any good reason to "cover[] the planet's surface with computers", it had better be doing something more useful than providing some fucking stock market liquidity.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
A) Require 1/2 hour averaging for all trades.
B) Tax all automated computer trades at 1%.
Result - trading moves to another exchange where this is not required. Your solutions depend on international cooperation between government and exchanges, all of which compete with each other. Good freaking luck getting policies like that instituted.
I think the greatest advantage of planetary computing is in its ability to find questions for provided answers. For example, if you were to have a question regarding Life, The Universe, and Everything, then planetary computing might be useful.
Hoist Number One and Number Six.
Let me begin by saying that I'm posting anonymously because I'm a professional in the financial industry.
First, I'll explain the inter-exchange arbitrage being used here: it comes in a few forms. Imagine the Philadelphia exchange has orders on its book for a share of Apple Inc stock (ticker AAPL) as follows: 200 to buy for $308.12 and 300 to sell at $308.14. The New York exchange has 500 to buy for $308.13 and 100 to sell at $308.14 . There's nothing anyone can do to make a profit.
Then things change. Perhaps someone does a trade in New York, taking out the orders on the sell side of the book. New York is now having 150 to buy at $308.15 and 700 to sell at $308.16. Since $308.15 > $308.14, someone can buy in Philadelphia and sell in New York, making a penny profit on 150 shares.
The first company to notice this and send the necessary electronic order messages makes $1.50. Repeat as necessary.
More complex versions of this same trade involve the same stock traded in different currencies, requiring a currency hedge at the same time. But the idea remains the same.
This sort of arbitrage has ALWAYS taken place in the markets. The HF traders don't do anything differently from what has historically been done, in this or really any other strategy. They just do it faster. Market makers have historically held small positions, by the way. Other posters who assume they used to hold millions in inventory are exaggerating. I don't see HF as any kind of slimy behavior, and I say this as someone whose firm is on the other side (i.e. the HF firms take money from us, lots of it, every day).
Regulations designed specifically to remove the profits of HF firms are neither wise nor beneficial. Regulations should concentrate on ensuring the markets are fair, efficient and reliable. If those regulations have the emergent property of killing the HF firms, that's fine.
It's worth noting that fairness, efficiency and reliability are sometimes competing goals. To take a low-frequency example, insider trading is illegal in the USA but not in some other places, and economists generally consider that information propagation is more efficient in those other places, at the obvious cost of diminished fairness.
The valid concerns about HF trading are not the profits made by those firms (which are anyway estimated to have a ceiling of $21B industry-wide by a well-known academic paper -- a fraction of investment banking profits). The valid concerns about HF are market stability and fairness.
I view fairness as having decreased with the advent of HF, in that HF firms are now likelier to prevent Joe Blow from trading "on the bid" or "on the offer". That's a cost to Joe Blow. On the other hand, bid-offer spreads have narrowed considerably, due mainly to the savage competition in HF. On the whole, Joe Blow therefore buys or sells at a better price than he used to. I therefore think the loss in fairness has been more than compensated by this increase in efficiency.
The situation is a little vaguer for big traders like my firm, where we trade so many shares that we have to worry about being "detected" and having markets move against us. But even for us I think the tradeoff is worth it.
Now let's consider market stability. Complex dynamic systems are subject to occasional wild behavior. This is even true of ones involving humans, as with the Dutch Tulip craze or the recent real-estate bubble. Dynamic systems run by machines can enter undesirable states faster than humans can usefully respond.
May 6 2010 is cited as an example, though I'll note that the crash happened over many minutes, not in mere milliseconds, and therefore was actually well within the range of human reaction times. Many human traders, some at our firm, made big profits off those using machines. This in itself serves as an excellent correction and lesson to those relying too much machines to trade, and has helped put humans back in the loop at many places, I'm sure.
Most of the posts here seem to be suggesting that HFT be scrapped in one form or another. I have a somewhat contrarian view; who cares? Arbitrage has always been a very technical field that normal day traders never got involved in much anyway. The HFT's now just make human arbitrage impossible, and scoop up a little cash by keeping markets consistent. You see, arbitrage exists because there's discrepancies, and HFT helps smooths those discrepancies out.
If you're a value investor buying shares in a company whose growth you believe in and intend to hold on to them for years, then HFT does not affect you at all. If you're a day trader trying to guess the direction of the stock market, they don't affect you either: you're still screwed; just like you would have been a decade ago. If you're a day trader trying to arbitrage, sure, these have put you out of business. But I suspect that's a rather small group.
I'd thought of this a few months ago, after reading the detailed report on the 2010 flash crash. Speed of light lag wasn't quite an issue, but it was close. Stocks are mostly traded in New York, while options are traded in Chicago. Round trip time between the two is at least 7ms. That's exploitable. Lag isn't just for video gamers any more.
Unfortunately, this isn't a joke. There is now special purpose hardware for high frequency trading. General purpose computers aren't fast enough for high frequency trading. This 1U device contains FPGAs, and custom trading algorithms are written in Matlab, compiled into Verilog, and loaded into the FPGAs.
Vendors are advertising "8 microsecond average latency, wire to application". Not milliseconds, microseconds.
but whitey's on the moon. if these guys put 5% of the effort they spend trying to optimize trading into - i dont know, building something? I bet they would dwarf anything the valley can come up with in terms of real innovation.
It actually does produce something and that is a high deal of liquidity. Something that you have in the market right now that is nice is that you can buy or sell any stock any time you want. Because of all this day trading, HFT, there is always stock being shuffled around, and in rather substantial amounts, so you can always get in or out of a stock when you please. That is a benefit.
However it is not a benefit that is worth the instability HFT causes. We need to fix the system, either with a time based tax or random delays or something. But we do need to recognize that it does provide a benefit, just not one that outweighs the cost.
Ofcourse I haven't read the article. The summary provides enough information: 1. The subject is arbitrage, not trading. The impact of the ideas summarized here on trading is negligable. For actual trading, latency is a much less important issue. 2. Arbitrage makes money by exploiting (and thereby reducing) inefficiencies. 3. The profits made by arbitrageurs should go down to reasonable levels, under the assumption that markets are efficient 4. The fact that arbitrageurs are still making enormous profits shows that we have much more serious issues in our financial system than the lag between exchanges
http://www.pdfernhout.net/recognizing-irony-is-a-key-to-transcending-militarism.html
This applies equally well to financial organizations: "Likewise, even United States three-letter agencies like the NSA and the CIA, as well as their foreign counterparts, are becoming ironic institutions in many ways. Despite probably having more computing power per square foot than any other place in the world, they seem not to have thought much about the implications of all that computer power and organized information to transform the world into a place of abundance for all. Cheap computing makes possible just about cheap everything else, as does the ability to make better designs through shared computing."
A 21st century issue: the irony of technologies of abundance in the hands of those still thinking in terms of scarcity.
HFT is a direct result of the decimalization that took place around April 2000, as mandated by the SEC. Up until that point, the market maker was the one who was screwing the individual investor because of the wide fractional bid/ask spreads that were being kept. When decimalization took place, price discovery went from being at a few predetermined fractions of a dollar to what we have today. With the resulting spreads being smaller, the incentive for a market maker to provide liquidity went away, as there just wasn't any incentive to do so. Many market makers today are now nothing more than glorified HFT themselves, and pass the resulting executions print for print onto the client. When the price finally reaches a level that the market maker may believe is over extended, he'll come in and take a long or short position. The whole purpose of decimalization was to reduce the costs the investor was paying for his trades in the market. The unwanted side-effect is an explosion of HFT and trade volumes at various price points in the sub-penny range in order to milk out inefficencies of price discovery that was introduced by the SEC.
Yes the HFT are making huge profits, but if an investor is in it for the long-term, most days the resulting price difference of a few pennies isnt going to matter much. Which is the lesser of 2 evils, the market maker prior to April of 2000, or the HFT of today?
Take your pick, the investor was always being raped in some form or other. None of this is anything new. I'd argue that the average investor is getting hurt less by HFT than he was by the market maker of a decade ago.
Result - [high frequency] trading moves to another exchange where this is not required...
and that sounds a whole lot like mission accomplished.
First of all, you're not talking about HFT really, but about arbitrage: making use of inefficiencies in the dissemination of information in a market. Arbitrage is as old as trading itself and now that trading happens with fast computers, the same goes for arbitrage. If some knowledge becomes available in some place, it will quickly spread over the entire market. In this process, the arbitrageur plays an important role: the parties that profit from trading are the parties that actually spread the information: if you buy/sell an instrument because it's under/over priced, you actually help to in/decrease its price. The fact that arbitrage rakes up big profits only means that the trading system is efficient. You should thus work to make it more efficient instead of killing the arbitrageur.
The solutions you propose are exactly symptom killers:
1. Adding a delay means you're withholding information from the markets. With less information, market participants make decisions that are less informed and thus poorer.
2. Adding a tax has actually the same result: if you raise a tax, you're actually putting a threshold on the level of information that can be disseminated with a profit. This will in effect mean that new information will only be sent once it reaches a certain level of impact and the tax thus functions as a delay for this information.
Why don't you propose a more open economy, where information is easier to get by and cheaper. This will automatically result in better prices (one of the important functions of financial markets: knowing what something is comparatively worth) and it will reduce the profits of the arbitrageurs.
the Quake kids have grown up and are now playing the stock market, and these are their 'gaming rigs'.
Do they come with lots of blue neon and a front panel which looks like Optimus Prime?
You are not a brain: http://books.google.com/books?id=2oV61CeDx-YC