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.'"

Comments

Another way to look at this:

[Kupfernigk]

To what extent is so called high speed trading actually turning into electronic non-shooting warfare? Some of the techniques described are essentially variations on DDOS and spam. The recent Scandinavian case throws into question the point at which the techniques shade into illegality - is it just that if you or I do it, it is illegal, whereas if a bank does it, it's business as usual?

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?

Increases liquidity at what cost?

[TubeSteak]

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.

Re:Increases liquidity at what cost?

[Archangel Michael]

A) Require 1/2 hour averaging for all trades. This will stop most arbitraging on two accounts: 1) it stops exploiting split second inefficiencies that can only be spotted by computers, 2) creates doubt to which price one is actually paying.

B) Tax all automated computer trades at 1%. Takes the profit motive out of computerized trading.

C) Charge all revocations of unused (non-expired) puts and calls a flat fee. This is to prevent flooding the market with option trades that people have no expectation of completing.

D) Tax profits made by short term traders at a higher rate than long term holder. I propose having several rates for capital gains based on how long a person holds a stock. Example (illustrative only) Less than two weeks @ 50%, less than six months@35%, 1 year @ 33%, 5years @25%, 10 years @10%, greater than 10 years @0%.

The problem isn't liquidity. Never was. Market is plenty liquid at 1/2 hour intervals. Low volume stocks need lower liquidity than high volume stock. The problem is exploitation of timing at split second intervals which can only be accomplished by computers, and has no basis in fundamental market principles. The goal should be to limit trades to people who actually hold stocks as investments, not in people making money off market fluctuations.

Re:Increases liquidity at what cost?

[Rich0]

I don't get why we can't even just have one-day ticks. Every day an order book accumulates, and at 5PM the exchange executes everything at the price that generates the most volume. Priority is given to sellers who offer the lowest price and buyers who offer the highest price. Within a price orders are executed in random order.

The book is kept secret until after all trades are settled. So, you can't see if the price is trending towards a price you like and then put in a bunch of sells for 0.01 to get ahead of the line - if you put in that price you might just find your trades executing at that price.

With such a system ordinary investors can compete with investing houses. Bad news means that everybody loses out at the same time, and the insiders don't have nearly the same advantage (getting news 15 minutes early can make a HUGE difference today). You could even make the trade settlement time midnight or something like that so that it is well after the business day so that last-minute news has more time to get around.

You wouldn't need so many market-makers and other forms of arbitrage since the total daily volume of a stock will tend to guarantee that there will always be buyers and sellers. Market makers could still fill a niche in low-volume stocks making sure that there are always buy and sell orders in the book.

You could even go a step further and execute trades once per week/month/etc - that would start to make investing more of a long-term thing and less of exploiting market psychology..

Re:Increases liquidity at what cost?

[bertok]

All of the potential issues you have raised could be fixed using just two minor tweaks to the grandparent's suggestion:

- Trade every hour, on the hour (this is unaffected by timezones)
- Trade 24/7 (it's done by computers, after all, so it makes zero sense for an exchange to be "open" at only certain times of day)
- Every trade is logically split into some small unit (share, dollar, whatever), and randomized, or an algorithm is used that effectively trades simultaneously in a completely fair way.

Done.

Problem solved.

The current situation is not necessary and the alternative proposed by the gp has no real issues except that a bunch of HFT traders would lose their jobs. Boo-friggin-hoo.

Highly Amoral

[gweihir]

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.

Re:Highly Amoral

[peter hoffman]

If HFT were to be legislatively controlled, it seems to me the most obvious way to do it would be by modifying the long and short term capital gains taxes to create a progressive system: the longer you hold the asset before taking the capital gain, the less tax you pay. If you had to pay 99% tax on a gain resulting from possessing an asset for less than 1 minute things would be a lot different.

This is not to say that I favor that solution, it's just one that occurs to me. I think there's a solution that doesn't require the use of force. If I were the CEO of a publicly company, I would not want to be listed on an exchange that allows HFT. If I were an amateur investor in stocks, I would not want to invest in companies listed on an exchange that allows HFT. As a result, there's clearly a market for a 'natural' exchange as opposed to one that is 'on steroids'.

Wont work in Dark Pools

[xquark]

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).

Re:Limits?

[camperslo]

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.