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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!!!!!
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.
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!
The traveller who has never before experienced an arctic summer, and who has been accustomed to think of Siberia as a land of eternal snow and ice, cannot help being astonished at the sudden and wonderful development of animal and vegetable life throughout that country in the month of June, and the rapidity of the transition from winter to summer in the course of a few short weeks. In the early part of June it is frequently possible to travel in 'the vicinity of Gizhiga upon dog-sledges, while by the last of the same month the trees are all in full leaf, primroses, cowslips, buttercups, valerian, cinquefoil, and labrador tea, blossom everywhere upon the higher plains and river banks, and the thermometer at noon frequently reaches 70 deg. Fahr. in the shade. There is no spring, in the usual acceptation of the word, at all. The disappearance of snow and the appearance of vegetation are almost simultaneous; and although the tundras or moss steppes, continue for some time to hold water like a saturated sponge, they are covered with flowers and blossoming blueberry bushes, and show no traces of the long, cold winter which has so recently ended.
George Kennan, Tent Life in Siberia
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!
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.
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.
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.
That people are doing this is a sign of a broken fiancial system (as if fiat currency based on debt didn't already establish that). They are not producing anything. They are buying low and selling high units of wealth that others have produced. They are not creating wealth, they are redistributing it.
This is the kind of shit that has madmen and economists thinking you can forever grow an economy in a finite world with finite resources. It's also the kind of shit that encourages people to view stocks as a way to gamble and not as investments. You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.
Anyone else find that line in the summary amusing:
Yeah, computers and networks are a "natural resource". In fact I have a few growing in my backyard. I just have to water them from time to time. Really, WTF?
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?
Suppose I got to the store to buy a bag of chips. I pick up the last bag from the shelf and go to buy it. You jump in front, grab the chips from from me, pay the guy and then tell me that you'll sell me the chips to me for only a dollar more than the price on the shelf.
Who has benefited from this other than the thieving scum who got in the way of my trade with the store owner?
Yes it IS a sin.
It's a SIN because the heads of NYSE and NASDAQ continue to spread this lie that HFT shops contribute liquidity to the system. THEY DO ANYTHING BUT!
Have you seen the offices these HFT shops rent out in New Jersey and CT? They're cheap Class B space, warehouse loft and other low-rent space. They don't have the capital it takes to be a market maker. They just have capital---and they aren't going to sit in the market when it is hurting and make trades no sane person would make to keep liquidity flowing.
That is the job of a REAL market-maker. A market-maker will step in and be the counterparty to keep the issues they are responsible on the exchange moving.
What the fuck do you think happened on the May 6 flash crash? Almost all the HFT shops ran to their server rooms and SIGSEGV their software and pulled out to avoid taking more pain. The bids all dried up on the NYSE which is why the first crazy market order for $0.01 a share came to the exchanges, NASDAQ cleared it so for a while, several stocks were at zero print... like Accenture.
When you have the most top companies on your exchange printing zero in the flash of an eye... YOUR MARKET IS BROKEN. How is this even debatable?
Why would I want to put the kids college fund money in this fucking disaster?
HFT sucks.
Another lie the chairs of NASDAQ and NYSE love to tell the world is that HFT speeds up price discovery.
How is this even POSSIBLY true??? They are algos. Those algos don't have any clue what the future performance of a company is. The algos are not going to tell you how successful AAPL's iPhone 5 will be, or when the next class action lawsuit is coming.
And algos break ALL THE TIME. It has been happening more often these days because stocks are breaking 120DMA more often, and most of these algos are doing nothing but backtracing trends on top of their arbitrage schemes. When a big investor comes in the room, they jump on him like nervous poodles.
That's why the May 6 event was such an eye opener. Waddle and Reed didn't cause the flash crash. They executed a normal transaction that wasn't even a Big Fish transaction, and all the algos went haywire.
So much for the quants and their MIT-smartness.
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.
Uh, no. The goal of all trade is to allocate capital to the institutions most likely to create value. HFTs don't give a shit who creates value. They don't allocate capital based on which companies are useful. They are a transactional cost paid by everyone else. They are best approximated not as a trade, but as a tax, albeit one that does absolutely nothing for the public good. The value removed from the markets by HFT is value extraction, not creation. This is a fundamental difference from everyone else playing.
You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.
What do you do with all the people renting investment properties now because they are not in a position to buy a home? If it wasn't for people investing in property there would be no rental market. I agree with you in principle but adjusting one thing has an effect on others. Solving the next problem then becomes the issue.
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.
Without an arbitrary investment in rental properties housing prices would fall. Supply and demand. It's a fallacy to think that if you flood the market with homes prices will drop never mind the current bust scenario. It is the land that has value and by turning land into investment properties you make land more scarce for those who would buy a home to live in. This drives up prices for the land itself. Without rental properties the developers would be out as they need those investors to buy up the surplus lots. We would return to buying individual lots, hiring a contractor and architect and having a home built.
That would be a good thing, employing many more skilled craftsman and less premanufactured homes built in factories.
A fool throws a stone into a well and a thousand sages can not remove it.
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.
No, what would happen is the lender would sell off that loan into a CMBS ( Commerical Mortgage Back Security). That CMBS would still be tranched out based on the risks of the asset pool ( it's not divided into shares ). And those tranches would be bought by any number of clients.
You seem to think the concept of Asset Backed Securities lead to the housing collapse. What lead to the housing collapse was simply banks giving loans they shouldn't have. Requiring 40% cash down on housing loans would have been another easy way to avoid all the problems.
-Malakai
A Dragon Lives in my Garage
Umm, you can. Sure, there are far too many people getting paid well for completely non-productive work, but if I spend two weeks creating a compiler that makes me and my team twice as efficient I have not detracted from anyone else, but have grown the productive capacity of the world by a small amount. Economics is not a zero sum game.
Additionally, those "finite resources" you mention include the 120-odd petawatts of solar energy slamming into the Earth, and the massive tidal energies caused by the Moon's influence. Whilst both those are technically finite, they are not so in the context of this conversation. Any of that energy used for productive use is completely additive, taking away nothing.
I know I'm focusing on just one small aspect of your post, but this idea that economics is zero-sum and that there isn't real productive growth going on needs to be stomped.
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.
Yes they do speed up price discovery. More buy and sell orders mean a lower difference between the spread between the price to buy(The Bid) and the price to sell(The Ask) a security. When there is a large difference between the two then people's orders become more spastic and volatile. They don't have the assurance of being able to sell or buy back right away if things go bad. Hence larger and more sudden orders.
I'm puzzled by your inference that humans already know the performance of a future stock. They don't. Nobody knows what's going to happen in the markets. All we have is educated guesses, and entrusting a computer to scalp trade for you is one possible educated guess to make.
Yes the events of the flash crash were alarming. But the stock market is a complex adaptive system. There have been new laws put in place, and if need be there will be more.
And as for why companies may be trading above their 120 day moving averages; perhaps it has something to do with the rebound from after the stocks crashed? After the market lost about 50% of it's value seem to me that any bounce back from that low would be a sharp one. The market has to come to an exaggerated fall to find the bottom.
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.
The are producing something, liquidity. Liquidity has value. It's like saying cab drivers don't do "real" work, they just redistribute people who do.