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Contemplating Financial Trading At Picosecond Resolution
pbahra writes "One complaint made of the modern stock market is that it is concerned too much on the short term. A second is a long time in cash-equities trading. Four or five years ago, trading firms started to talk of trading speeds in terms of milliseconds. But in recent weeks trading geeks have started to talk about picoseconds, in what is a truly mind-boggling concept: a picosecond is one trillionth of a second. Put another way, a picosecond is to one second what one second is to 31,700 years."
In Kurt Vonnegut's 1997 novel Hocus Pocus, the United States is brought to its knees financially by a company called Microsecond Arbitrage. Everyone invests through them and makes lots of money until a glitch happens and someone else's computer is faster that day. Then the entire country loses its shirt.
Word to the wise.....
Well, this isn't a case of time-lag so much as it's a recognition that interactions with stock trading is actually a control system. The traders are trying to use feed-forward control to predict when and where the market is going to move and apply the right 'control action' (ie. buy or sell) at the appropriate time. Unlike most dynamic systems, however, you are not the only controller - you are trying to predict and exploit the behaviour of other controllers in the system.
With multiple players, the aggregate dynamics are something akin to a dog-fight as each trading algorithm circles and dodges, trying to exploit weaknesses and failures in its adversaries so as to make fractional gains in the time available. If you can control on a tighter time-scale than your opponents, then you can achieve more finely-grained dynamic buy-sell strategies that maximise your profit.
The fixed time-lag between you and the actual market is actually largely irrelevant because of the way the fast dynamic control strategy is being employed. To extend the metaphor, think of them like a attack formation flying to the enemy. If your aircraft can make their attack and withdraw before the enemy can reposition defenses, you will be more successful. The fact that it took an hour for your formation to reach the enemy in the first place is irrelevant.
Scientists point out problems, engineers fix them
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I don't think it should be illegal, I just think one dimension of the assessed taxes should be length of time the asset is held. Set thresholds at, say
1 second -- 99.99% marginal tax
1 minute -- 99% marginal tax
1 hour -- 95% marginal tax
1 day -- 90% marginal tax
3 months -- 50% marginal tax
1 year -- 15% marginal tax (today's capital gains rate)
10 years -- 10% marginal tax
I actually know a local guy who implements trading algorithms in programmable-gate-array hardware for the purposes of instant trading.
Nothing that crazy is needed just add a 10c per trade tax, the only problem is all the major trading countries would need to do it simultaneously or else the market would just move. I thought we were close a few years ago when the central banks and regulators started moving in lock step on policy but that only lasted until the first European debt crisis hit and China and the US got in the spat about currency valuations.
There are 4 boxes to use in the defense of liberty: soap, ballot, jury, ammo. Use in that order. Starting now.
Although the picosecond thing is silly, the New York Stock Exchange now operates a co-location facility in which each trading platform gets a uniform 35 microsecond latency for the incoming trade data. Some systems can turn around that data and do a trade within 12 microseconds.
Computers aren't fast enough for this. The latest thing is writing trading algorithms in Verilog and compiling them into an FPGA.
This worries me.