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NJ Server Farms Remake the US Financial Markets

Posted by Soulskill on from the flops-to-dollars dept.

1sockchuck writes "The engine of Wall Street has shifted from the stock exchange floor to data centers in New Jersey, where computer-driven trading now accounts for 56 percent of all trading activity, according to the New York Times. 'While this Tron landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company,' the Times writes. 'For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.' There are also photos of the data centers powering the high-speed trading operations, while 60 Minutes has video of a huge new 'liquidity center' run by the NYSE."

13 of 216 comments (clear)

  1. short term skimming by FuckingNickName · · Score: 4, Insightful

    And nothing of value was gained.

    1. Re:short term skimming by purpledinoz · · Score: 2, Insightful

      Exactly. Goldman Sachs and JP Morgan earn a huge chunk of their profit from high-frequency trading. This profit must come at an expense of someone else (like regular stock holders). In my mind, this is legal theft.

    2. Re:short term skimming by raw-sewage · · Score: 2, Insightful

      Exactly. Goldman Sachs and JP Morgan earn a huge chunk of their profit from high-frequency trading. This profit must come at an expense of someone else (like regular stock holders). In my mind, this is legal theft.

      I see this mantra repeated often around here, but I'm not so sure it's entirely true. First, what is a "regular stock holder"? On one end, there are small-time, buy-and-hold investors such as myself; on the other end, there are big institutional investors who manage massive portfolios for pension funds, insurance companies, mutual funds, etc. And there's everything in between. From one end of the spectrum to the next, you have very different trading profiles, and thus are affected very differently by high-frequency trading.

      For someone like myself, I make maybe a few dozen (relatively) small buys per year. These buys are usually in the neighborhood of 100 shares. If a high-frequency trading program jumps in and effectively front-runs me to to make a few pennies, I don't really care. Overpaying by a penny or two per share means nothing given my buy and hold (long term) strategy. I'm already out $9.99 per trade in commissions to my broker. I'm looking at a horizon of at least ten years, when these relatively small additional costs shouldn't matter.

      On the other end of the spectrum is the big institutional investor, like the pension- or mutual-fund manager. This person's job is to constantly rebalance the portfolio to meet some pre-defined metrics; he's generally actively trading huge amounts on a daily basis. While he certainly wants to get the best price possible when he trades, it's practically impossible for him to do that given the volumes in which he deals. Unless he has a highly specialized trading algorithm---that is, something just as sophisticated as the high-frequency traders---he can't help but signal his intentions to the market. Telegraphing his intentions is what makes him a "victim" of the high-frequency traders.

      I'm not a fund manager, but my assumption is that, like me and my small buy-and-hold strategy, he also doesn't care about having a small percentage skimmed off of each transaction. To me, it's like buying a big-ticket item, such as a car. Say you budget $27k to buy yourself a new car. Now, some enterprising company goes out and manages a massive, real-time database of every car available for sale in the country. This company can use this database to find you the exact car you want, right now for $27,250. If you're willing to spend $27k, do you really care if you pay an extra $250? And for that $250, you get precisely what you want, and don't have to wait. Compared to going to a dealer, who, if you're lucky, might have what you want at your price... but chances are, the dealer will have something close to what you want, and you'll have to negotiate the price. Or maybe the dealer can get you exactly what you want, but you'll have to wait while he works the intra-dealer process to provision the car. Or maybe he can get you exactly what you want, for even less than $27k, but you'll have to wait for the car to be manufactured. A car buyer can face all these scenarios, but I believe the fund manager most closely mimics the first: that is, he knows exactly what he wants, and he wants it right now.

      My prediction is that we'll see the high-frequency trading landscape continue to evolve. Like anything, there will come a day when that kind of business and the skills required to do it are commoditized. And when it reaches that point, it will be much less lucrative. I think we'll see traders of all profiles using ideas and techniques from the high-frequency world in their own trading, meaning that the very people high-frequency traders take from will become direct competitors. The small-time trader like me will implicitly use such techniques, though they will be invisible, as it will actually be implemented by my discount broker (perhaps they'll offer

    3. Re:short term skimming by pyite · · Score: 4, Insightful

      We paid for your dumb errors in the subprime crisis, so now that you are creating speculation on yet another imaginary value (physical closeness to the servers of the stock exchange ? Really ? Changes in the value of a company on the millisecond scale ? Are you serious ? ) you better show your whole scheme.

      Whose dumb errors in the subprime crisis? Those errors were made by multiple parties. First and foremost, the people buying more than they could afford. It's taboo to demonize "Main Street," but let's face it, if people could, or chose to, do basic math, they would have realized they couldn't afford what they were buying. Second, stupid mortgage companies who relied on people's word that they could afford things. Third, those who thought tranching baskets of mortgages and pricing the tranches using default correlations for each tranche that were advantageous just to that tranche rather than rooted in reality.

      These three groups of people have almost nothing in common with those who trade equities and equities derivatives. So, please, don't put two things you don't understand into the same bucket simply because both are products of "Wall Street."

      --

      "Nature doesn't care how smart you are. You can still be wrong." - Richard Feynman

    4. Re:short term skimming by Yvanhoe · · Score: 3, Insightful

      I have no problem considering a part of "main street" has some responsibility. But people who can't pay their debts is a problem known since millenniums (yes it is). Banker is a profession that is as old as this problem (yes it is). Having bankers unable to evaluate at least approximately the risk of a debt is like a farmer who forgot to plant seeds one whole year. Unforgettable. They showed grave incompetence, we now have to look behind their shoulders for their every move because no politician has the guts to make them pay.

      --
      The Wise adapts himself to the world. The Fool adapts the world to himself. Therefore, all progress depends on the Fool.
    5. Re:short term skimming by Dhalka226 · · Score: 3, Insightful

      First and foremost, the people buying more than they could afford. It's taboo to demonize "Main Street," but let's face it, if people could, or chose to, do basic math, they would have realized they couldn't afford what they were buying.

      While that's not untrue, it's somewhat disingenuous. If people knew basic auto repair, they could save a lot of money on oil changes and auto mechanics. If people knew basic home improvement skills, they could save a lot of money on handymen and repair guys.

      But most people don't, and in that void of ignorance, fear or indifference exists entire industries who we collectively tag with the sometimes laughable title of "professional." A person doing some basic math might have figured out they couldn't afford what they were buying (and you're grossly oversimplifying the problem, by the way), but instead they relied on a series of "professionals" to do it for them -- professionals who are paid handsomely, not only in terms of their own salaries but in terms of commissions (real estate) and interest (banks/mortgage companies). Both of these parties nodded their heads emphatically and declared "of COURSE you can afford this, don't worry about it! Sign here!"

      They did it from simple greed, and from a misguided belief that eh, even if we have to boot these freeloaders out of their house we have some of their money in pocket and real estate prices keep going up so we won't lose THAT much when we sell it to the next sucker. Through their greed, and their staggering unprofessionalism, they essentially collapsed two entire industries with a trickle-down effect that collapsed even more; industries that survive today only through the intervention of the federal government, right or wrong.

      Some extra personal accountability is certainly a good idea to protect ourselves, but when we hire or deal with professionals I don't think any sane person expects them to be so wholly unprofessional as to tank their entire industry. They don't deserve to be let off the hook for that, not to any degree, even if peoples' ignorance is what allows them to operate that way. Ignorance, and more importantly knowledge of their own ignorance, is precisely why people hire professionals in the first place (not that there is much option when we're talking about a mortgage, I admit).

      That these idiots are distinct from equities traders I do not deny, though I also don't think they're quite as separate as you make them out to be.

  2. I Can't Help But Think... by sycodon · · Score: 4, Insightful

    ...that automated trading has and will cause more trouble than it is worth to the overall economy.

    --
    When Fascism comes to America, it will call itself Anti-Fascism, and tell you to give up your guns.
  3. Humans in the loop. by blair1q · · Score: 3, Insightful

    “Markets are there for capital formation and long-term investment, not for gaming,” [Michael Durbin] says here

    Amen to that. The markets should operate as though there are humans at every step. Otherwise there's no need for humans on the edges, either.

    1. Re:Humans in the loop. by khallow · · Score: 1, Insightful

      Amen to that. The markets should operate as though there are humans at every step. Otherwise there's no need for humans on the edges, either.

      Conversely, if I want to use a market, I don't want it saddled with Luddite hysteria. The value of a market is not in the employment it provides to us, but to the goods and services we can acquire through it. I couldn't care in the least, if there is a complex ecosystem of unsupervised trade programs operating at minute time scales on the market. Instead, like any tool, I merely wish it to work when I use it.

  4. Average stock purchase held under a minute by cpm99352 · · Score: 3, Insightful

    Majority of trading (at least in the US) is computer. According to this, average length of time a stock is held is under 35 seconds.

    The mainstream financial reporting in the US is a complete joke -- everyone fixates on the Dow, as though it held any meaning. At the end of each day, some "meaningful" reason is given for a less than 1% move, however automated trading never seems to be included.

    Netflix joins the Dow??? Is that what this country is reduced to? No manufacturing, just service?

    Meanwhile, SEC regulation is a total joke, insider selling is rampant, accounting is a joke...

    But, if you're a retiree, where else can you hunt down returns? CDs are long dead.

  5. Re:Common View, Common Error by e065c8515d206cb0e190 · · Score: 4, Insightful

    No offense, but if you need a definition of bid-ask spread, you need to learn the basics before criticizing HFTs.

  6. Re:in-equity by Anonymous Coward · · Score: 3, Insightful

    If you match bids and offers once per hour, you're going to widen the spread pretty dramatically. It's no coincidence that the spreads have tightened up as trading speed has increased. If you force market markers to hold securities for at least one hour, they're going to have to widen their spreads pretty dramatically in order to compensate for the risk.

    You would also see significantly higher volatility in the market. The way things currently stand, you can get a very good idea of what a security is worth at any given instant. If you have to wait an hour before the market updates, it's going to be hard to predict what the next trade price will be. That's going to result in a lot more price volatility, which will also increase spreads.

    Another consequence is that you're likely to put smaller shops completely out of business. Holding a security for a minimum of one hour in an environment where pricing information is not available is just not something that smaller firms will be able to do (if nothing else, net capital regulations will foreclose it, due to the enormous risk). For the big firms, it will be like a return to the good old days- all those pesky HTFs gone, and only 2-3 market makers for any given security. This, more than anything else, will increase spreads and spell the end of the exchanges and a return us to the days of market makers. "You want to buy 100 shares of MSFT? You'll pay what we say. What are you going to do, go buy it from someone else? Good luck with that!" "You're ready to sell your 100 shares of MSFT? You'll get what we're willing to give you. What are you going to do, go to someone else? Try to trade it on an exchange? Har har har!"

    This is a complex situation. The rise of the HFTs was one of the biggest shakeups in Wall Street history- the large firms lost huge chunks of their control of the market, and are still reeling from the shock of lost profits. They would be more than happy to see the end of HFT and a return to the days when they controlled the market. HFT's may cost the market $0.01/share, but that's nothing compared to the bad old days of monopoly market makers extracting $2/share or more.

  7. Re:Re-couple Market Access With Market Making by alexmin · · Score: 3, Insightful

    When retail investor enters orders into his Schwab/Ameritrade/Interactive Brokers web portal, guess where those orders go? Yep, his broker colo facilities in Mahwah (NYSE), Carteret (NASDAQ) or Weehawken (ARCA/BATS). Main difference is that those orders get exercised by broker-owned systems and not customer's. Want your's gear in place? Power, cooling are not free as you probably know so be ready to pay up beyond $10/month account maintenance fee.

    Anyway, you are missing the point. Investment in stock market does NOT require frequent executions. It is about buying when the stuff is cheap and then holding long time (like many years long) and then selling when you need money (not when it's expensive, that's speculation.) Speed is not important, valueing correctly to know when stuff is cheap is paramount.

    I am involved in trading for living but did not touch my personal account in many-many months.