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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.'"
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!
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.
These guys go too far. One of these days we'll have botnets doing trading with funds from sniffed credit/debit info. They could even pay back what they took... then profits get dumped anonymously to campaign funds. Botnets do get free-speech rights don't they?? (they may have an opinion on capital gains taxes, or want to own broadcast stations)
If it makes anyone feel better, call that pile of computers a bank and lend it some "government" money
Trading in those strange mortgage death futures is too risky, botnet futures are the new thing.
Cylons and Skynet Terminators will have their own electronic religion making them tax exempt.
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.
A tunnel bored directly between London and New York would be even faster and require less cooling. Only two points intersecting the center would be competitive with my Earth Chord Trading Tunnels!
Your idea intrigues me and I would like to subscribe to your burrito delivery service.
You are not a brain: http://books.google.com/books?id=2oV61CeDx-YC
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.
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.
3. Disallow orders to be canceled unless open for x seconds.
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