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:Why the snow

[sirrunsalot]

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