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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."
These people are parasites. They provide nothing of value to the world; they just take. This crap should be illegal.
So unless they've found a way to break the light barrier, this is a load of bull.
Thanks for fucking up the market for the rest of the world. This image comes to mind..
http://farm4.static.flickr.com/3014/2907411559_117ac480b5.jpg
Only the State obtains its revenue by coercion. - Murray Rothbard
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.....
Honestly, this is really a bad idea for overall market stability. What we really need is a much slower, yet fairer system.
What I'd suggest is something similar to synchronous clocking:
Every second, on the second, prices are published.
500 ms later, orders are placed and fulfilled.
500 ms later, the updated prices are published.
Benefit #1: fairness - those who are closest to the exchange or have stupidly fast hardware can't get in front of the rest.
Benefit #2: slower responses. If the clock can only "tick" 60 times a minute, there is a chance for human intervention before disasters happen.
Benefit #3: markets are more able to serve the rest of society, rather than being used purely for "gambling". imho, the existence of "high frequency trading" is a kind of tragedy of the commons: nobody really "wins", but if everyone else does it, and you don't, you lose.
I'd suggest every minute and 30 seconds respectively so human beings can also participate.
And you also don't understand how deep this goes. This is not about trading fast. They are actually trading ahead of trade execution.
Flash trading is a practice in which some equity exchanges hold orders to buy and sell shares for a split second before making that information public (available to other exchanges). The exchanges' customers can view these prices ahead of other traders for a fee. High-speed computer software can take advantage of that brief period between when an order is placed and when it's executed to allow those members to potentially get better prices and profits by slipping in and making the trade themselves.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZwoslIGa5JQ
http://www.marketswiki.com/mwiki/Flash_trade
Now, the time window is about 50-300ms that the orders to be executed are posted and the automated systems can intervene. Basically, if you have orders like following coming in within 200ms (1/5 of a second),
PUT 1000@31
PUT 500@30
PUT 500@30.1
CALL 1000@market
CALL 100@29.5
the flash orders will come in, buy the two sell orders and sell it @ 31 to the market order and you end up with,
PUT 1000@31
CALL 100@29.5
This effectively stole $950 from the market order. But then they will pay 2x the trade fees to the exchange to split in their trades ahead of the others. This isn't about "testing" the market, but simply going right in the middle between transactions and milking them for the most they can. It is not trading - it is stealing.
Agree with those who say these guys are essentially parasites. But, it's worse.
The one thing that MUST change -- these high frequency trading systems have malfunctioned, so they end up dumping ~$30-40 a share stock for $1 a share. Did the company running it lose money (and, consequently, everyone else make a bit by getting stock at a substantial discount)? Oh no. The stock exchange *CANCELLED* their trades. If you, I, or some regular trader, accidentally put up stock for $1 instead of $41, would anyone "fix" it for us? Of course not. These true parasites benefit from their high frequency trades, but when that would lose them money at high frequency the exchange "fixes" it for them.
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.
Man, there is so much misinformation in this thread, I could spend the whole day here.
HFT guys aren't stealing money from you- they are actually stealing money from the guys who have been ripping you off for decades- the exchanges, the market makers, the brokers, and everyone else in between.
Think about it- E-Trade and the like have brought down the cost of trading to about $9 a share (there is also the cost of the bid/ask spread, but we will leave that out for now, especially since these days its almost disappeared). How many other businesses do you know that can get away with a $9 transaction fee? Can you imagine going to a garage sale, buying a box of books, and having the seller say "ok that will be $5 + a $9 transaction fee?" That $9 fee is going to all the guys I mentioned above. Not too long ago, that fee was more like $50. But what's even worse is, and this is where HFT comes in, is that when you saw the stock ticker, and saw IBM trading at $80, you could neither buy nor sell that stock for $80. At best, you could buy that stock for $80.08 and sell it for $79.92, though it was just as likely to be 80.25 and 79.75. That "spread" went to a guy called the market maker. The market maker is the guy you actually buy and sell to, you don't directly buy and sell with other people (in our garage sale example, the seller would just bring his stuff to market, and the market maker would buy it off him, and then sell the stuff to you). When you watch movies showing the stock exchange, and everyone is yelling buy and sell, they are actually yelling at the guys in the middle of the floor- the market makers. The market maker collected that spread. In exchange for that privilege, he had some responsibilities- to always buy your stock, no matter if no one else wanted it.
Anyway, for decades this was a very lucrative business. Partially because market structure made the spreads so wide, and partially because it was so easy for these guys to front run, and also the chummy nature of these groups lead to a lot of gentleman's agreements where everyone kind of agreed to not step on each other's toes too often. Then came electronic trading, and subsequently decimalization. The HFT guys came in and just started spiking the volume in the markets, and also acting as market makers themselves to an extent. This has tightened spreads to the point where if you see an $80 print on IBM, you can almost certainly buy it for $80.01 and sell it for $79.99. The result of this means that any "manual" (not electronic) market maker has been wiped out or moved to automated quoting systems. They are tightening the spreads and taking money from the MM's and in some cases side stepping the brokers, and keeping the profit for themselves.
So no, they aren't stealing from Joe Retail trader in any way. If anything, they are helping you- you don't get ripped off when you sell your 50 shares of IBM anymore. Your broker and the market makers are the ones who are being stolen from- market making is now a highly competitive difficult business, and brokers are staying alive mostly by internalizing flow (and the smaller guys who can't do that are scrambling right now, and will have to consolidate).