Slashdot Mirror
High-Frequency Traders Use 50-Year-Old Wireless Tech
jfruh writes "In the world of high-frequency stock trading, every millisecond is money. That's why many firms are getting information and sending big orders not through modern fiber-optic networks, but using line-of-site microwave repeaters, a technology that's over 50 years old. Because electromagnetic radiation passes more quickly through air than glass, and takes a more direct route, the older technology is seeing something of a renaissance."
In the world of high-frequency stock trading, every millisecond is money
Always good to be reassured that the market reflects the intrinsic value of the companies instead of behaving as a high-tech casino.
The traders who want to keep their jobs use line-of-SIGHT microwave transmission.
Have no clue what line-of-site is, but sounds like it doesn't transmit beyond the local building.
Assclown submitter and illiterate editor.
When you have hundreds if not thousands of highly educated minds bent on squeezing out the very last drop of speed to facilitate an activity which is right up there with spamming in terms of societal benefit, well it strikes me as a tremendous and tragic waste. And yet this is what pays the bills. So: score it one point for capitalism. Yay.
line of sight
Must be the publiek skool edumakashun.
I think this poor child was left behind.
Excuse me, but please get off my Pennisetum Clandestinum, eh!
Just like Hungry Jacks (Burger King) uses 50 year old tech to heat my burgers.
Jeez! due eye half too curect every-one round hear?
If it needs quick transmission of information, then it does reflect reality.
Oh it reflects reality, alright. But it is detached from the companies whose stocks the market is supposed to represent
It reacts to other people buying/selling -- a few flash crashes have already demonstrated that. One faulty algorithm accidentally dumps lots of stocks and the entire market goes into a tailspin (with no actual cause)
Go read up what high speed algo traders are doing and you might change that opinion.
They are abusing their latency advantage by adding orders that they cancel microseconds later, and other manipulative events that siphons value from other traders.
Your truck analogy would be me selling you 1.5 ton gold, and being aware that you're going to drive 2000km and sell it at a profit, after selling it to you I phone my contact 2000kms away and have him sell another 1.5 ton gold at your target destination. When you arrive there, my contact have ruined your initial profit opportunity, and you're either stuck with no liquidity or can sell your 1.5 ton gold to my contact agent at a loss. So not only did I steal your opportunity, I decided to earn money off you by selling my gold to you at first for profit, and then buying it back, at profit again.
This is not about me having an 18 wheeler, it's about me being massively priviledged in both capital, resources and information flow and using it to vampire money from the efforts of others. It doesn't add value, or efficiency, it removes it and adds voltatility and risk to everything.
The main reason the traders want microsecond responses is to respond to each other, not to developments in the real world.
Once one trader buys shares, these change in value, which can trigger automated responses from all the other traders. And frankly, the combined algorithm of all these traders is what makes the market behave as it does. And that's so complicated that nobody can test it for every eventuality (also, the algorithms are secret). I can see that some people think that there is an element of randomness in that.
I think it is more like a double pendulum, or the butterfly effect. Science can explain what happened, looking back, but science cannot easily predict what will happen in a few minutes. It does have an element of randomness. It is not completely random, but to a layman it sure seems to be random.
Unfortunately, recent history has shown that the traders understand the market just as well as any layman. And that means this is just a form of gambling.
If your orders have to transit hundreds of km, whether it's at 3e8 or 2e8 m/s, you're already at a disadvantage compared to those that have their servers co-located with or next door to the exchange's servers.
High Frequency trading is essentially the action of manipulating the system, constantly creating and destroying orders faster than others involved in the market.
By this, you can essentially become a man-in-the-middle for market transactions and skim a small amount off of each.
Additionally, many of the algorithms simply forge orders and then subsequently cancel them faster than the system can process them. What this does is basically slow down the system for everyone else, and create a lag that they can further take advantage of to skim off the top.
The major trading indicies are OK with this, because they are paid on a per-transaction basis, and happily collect their fraction of a cent from each of these high-speed traders.
In some low volume, they do represent increased liquidity in the market and they do bring buy-sell spreads down. This is why it was first allowed in the 1990s by the market makers.
Today, they represent something like 60%-80% of all market traffic and simply skim dollars off of trades. They invest big money in artificially delaying other people's transactions to manipulate the spread between a buy and sell order and to take advantage of market swings, because they can issue multiple buy-sell-buy-sell sequences before a single long-term buyer is capable of getting a single order in.
It is nothing more than a high-tech fraud... it appears to be legal right now, because nobody has decided to stop it and has many powerful billionaires behind it, but in the end, it's not much different than the scheme in Superman 2 or Office Space. Skim a quarter penny off every transaction and I guess nobody notices....
By the way, I spoke to a trader who writes these algorithms.
She (yeah, she) told me that she thought it was evil, but she is paid too well to say anything. She seriously makes a half million USD per year AND has a private account in the trading system that returns 3% PER DAY.
Yikes.
..and then quickly recovers. You seem to want to leave that part out.
The only problem is when the SEC gets involved and undoes transactions to protect the automated traders from the massive losses incurred by their incorrect valuation.
"His name was James Damore."
I was involved in establishing one of the first major Electronic Markets in Germany. The country was quite decentralised with regional financial centres so we made sure that everyone communicated with the exchange (situated in Frankfurt) at the same speed. We even had line simulators to ensure that users in Frankfurt saw similar response times to users in Hamburg.
Now exchanges are more or less forced to join the race for the bottom by offering co-lo services (rackspace in the Exchange) where you are just a LAN switch away from theeExchange infrastructure. If you don't support that, the alleged "liquidity" moves to another exchange. Inside the machines, the algorithms are now run on the graphics cards (cheap multiprocessing) so they can run evven faster. Others use custom signal processing hardware.
Users actually issuing buy or sell orders to hold are never that close, the decision making happens within the institution not in the Exchange building. The "algo" machines just act as a man in the mmiddle driving prices to their advantage. Also, the algo traders are imposing a massive load on the order book and matching code within the exchange's systems. generally speaking the systems were chosen for reliability rather than pure speed.
See my journal, I write things there
By the way, I spoke to a trader who writes these algorithms.
She (yeah, she) told me that she thought it was evil, but she is paid too well to say anything. She seriously makes a half million USD per year AND has a private account in the trading system that returns 3% PER DAY.
Yikes.
You're making that up.
I have long argued that stockmarkets should have a 10 second order freeze. That would mean that if you place an order to buy a stock at a given price then you can't remove that order for a whole 10 seconds, you have to stand by your order for that amount of time.
Thousands of orders are placed and pulled every second, even every millisecond. There is a steady flow of orders being placed and pulled.
Consider this: Is an order to buy or sell a stock which is pulled within a millisecond a real order, or is it just market manipulation?
9/11: Never forget it was a false-flag operation
private account in the trading system that returns 3% PER DAY.
In other words. If she invest $1000 in her account, she will have $136.423.718 after two years of trading. Insane - or she might have been exaggerating.
($1000*1.03^400 = $136.423.718 (200 trading days per year))
You really think algorithms that feed off of and fight each other on microsecond timescales, placing and then shorting more orders for shares of companies than exist in the entire world, reduce volatility?
I know for a fact that HFT's reduce the spread between BID and ASK because numerous studies have been done showing empirically that this is the case. This means that all the people that cry that they are "siphoning money off the market" and other such crap are full of shit. You are getting better BID's and ASK's because the HFT's are in the market, therefore their percentage of the transaction is just a few for a worthwhile service.
Here is one citation and if you want the PDF, try here.
The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.
Data and facts trumps FUD every day of the week in my book.
"His name was James Damore."
The whole field of transmitting the high-frequency trading information seems to be going away in favor of FPGA's sitting right on the fiber leaving Wall Str.
ftp://ftp.bittware.com/documents/data_sheets/ds-hft.pdf
By putting these sorts of devices directly on leased connections from the stock market, adjacent to the stock market, they eliminate the need for the extremely expensive and often quite unreliable remote high speed connections. I was recently privileged to hear a presentation on the risks of data loss on those lines: they're apparently using multicast for high speed synchronoous transmission, But by the time you've checksummed and re-assembled your data and re-collected the lost packets, it can actually be _slower_ than normal TCP, and the the data verification technologies are often poorly tested.
The key to using the FPGA's is to tune and simplify the models that are stored and processed locally, in place of the expensive remote data centers. And updating those devices doesn't require the low latency and high speed: the analysis of stored data and updates of models can be done remotely and much more slowly.
Congratulations, great analogy! And I wonder, how is this legal?
"Now that we've established what you are, ma'am, it's simply a matter of negotiating the price."
My God, it's Full of Source!
OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
Because of certain taxes that East Asian governments impose on financial transactions, high-frequency trading hasn't made such inroads there.
As long as our government continue to codify crimes into the financial system, the system will continue to act criminally. If we restored the former definition of the word "crime"* this problem (and many, many, many others) would simply not exist.
* novel concept- forbid crime.
They feared that it could be used to suppress protest or support unpopular rule.
No value is destroyed other than for those who decide to sell their stocks because the prices changed with "no actual cause", and even that value isn't destroyed it's transferred to those who bought the stocks when they were priced way under their actual value.
No she doesn't, she's simply likes to lie and you didn't bother doing the trivial "does that make sense" check before repeating those lies.
Or you're doing the initial lying, of course.
There are several answers to "how is this legal" but they boil down to a lack of political will to outlaw the practice. You could blame the politicians for being the in pocket of big Wall Street firms, or you could blame the small investor for not marching on Washington in an outrage. Take your pick.
[Sir Garlon] is the marvellest knight that is now living, for he destroyeth many good knights, for he goeth invisible.
I've worked in HFT for 7 years, at 2 companies, and I can tell you from this experience that you are wrong.
Entering and order and cancelling immediately repeatedly goes by many names, e.g. flashing, and is illegal. Companies that do it will at a minimum get fined (eliminating possibly profit from it), and can be expelled from the exchange - meaning no future profit.
ALL KINDS OF MANIPULATION ARE ILLEGAL.
Being HFT doesn't change that.
BTW I've seen the kinds of fines that the SROs can hand out (this was from a mistake, not even manipulation), and they are enough to make you blanch.
The SEC has been investigating HFT for years, learning whatever they can, and believe me, any company that can singlehandedly push the markets around is taken very seriously. A working stock market is the SEC's #1 concern.
HFT uses that same trades that people have used for years, such as arbitrage, but using technology to make it more efficient.
This is bullshit.
1. Many exchanges have message rate limits.
2. Send ing then cancelling repeatedly is illegal, and is monitored for by the exchange
3. ECNs (basically exchanges) charge for TRADEs NOT for orders, quotes or other messages. Infrastructure for high messaging rates costs them, so they have an incentive to keep rates DOWN. In fact, they have a minimum message per trade ratio, to control this.
4. There is no way to be a mitn. Each participant sends orders and cancels to the exchange. The exchange matches orders and creates trades, in what's called a matching engine. Participants have no way to access this, and no way to "get in the middle" of other participants orders.
You have no idea what you are talking about at all.
Sure I am. If a trader wants to set his stock to automatically get sold because someone elses makes a transaction on one side of some threshold price, that's his business. He'd be an idiot of course, but that fine. Still no value is lost (you know the only claim I'm arguing against) - it's transferred to whomever bought the stock because they didn't use stock prices as the sole factor in decision making.
Your math is wrong. In fact, she would have 100000x1.03^600 assuming each year has 200 trading days. This equates to around 5 billion dollars.
It's obviously bollocks.
I've been paying into a self invested pension since March 2010. If I'd been making 3% per day, my very first payment into the pension would now be worth around 30,000 trillion GBP. Even if we only count trading days it I think it would be around 4 trillion GBP. (sorry, can't be bothered to work out exactly how many trading days)
Nobody is making 3% per day compounded. Sure, 3% per day for a short while on a relatively small investment is possible. My best investment ever made a little under 2.5% per day or just over 3.5% per day if you only count trading days. But regardless of whether this was luck or skill it's impossible to maintain it.
Tim.
God said, "div D = rho, div B = 0, curl E = -@B/@t, curl H = J + @D/@t," and there was light.
Does she make 500,000 dollars a year? Don't know, don't care.
Does her private account return 3% per day? No.
On average a year contains 250 trading days. 3%/day for 250 days is 1.03^250 = 1,619.22% in a year.
If the trader mentioned put in 100$ of her 500,000$/year salary into her traders account at the end of 2009, she'd come out of 2010 with $161,900. By the end of 2011, those 161,900 dollars would have become 262 million dollars. And by the end of 2012 those 262 million dollars would have become 424 billion dollars. End of 2013 her account will be worth 686 trillion.
Just for reference, in 2011 the entire world's GDP was about 69 trillion.
End of 2014: 1,110 quadrillion.
End of 2015: 1,798 quintillion.
End of 2016: 2,911 sextillion dollars.
Or put another way - by January 1st 2017, she'd be able to give every single person on the planet more than 300 trillion dollars each.
The conclusion is REALLY simple: You are either full of shit or an unbelievably stupid idiot for believing her claim - and I know which one applies to the mods who modded you interesting.
I'll grant that I cherry picked the data but you can get the hysterical data here and look for yourself. The question for 2012 is whether HFT has finally run its course or whether the market is nearly entirely HFT. I suspect mostly the latter.
> What if I find out (legally) that somebody is going to deliver 1.5 tons of gold 2000km away and are
> driving in a truck to deliver it. If I've invested heavily in airplanes, I could deliver 1.5 tons of gold to
> that person and beat the truck guy so when he arrives his opportunity is lost and has to sell it to me
> cheaper than I sold it to the target person. This is completely legal, and how the world works. I was
> smart investing in airplanes.
No its not. Nobody is going to deliver gold without a purchase agreement having been made.
So even if you show up ahead of time and attempt to sell your gold cheaper, the person who was taking the delivery, while he is free to buy your gold, must also puchase all of the gold which he had already agreed to purchase, from whom he agreed to purchase it.
That is actually how the world works. Sure there may be other circumstances depending on the nature of the agreements/laws (in some circumstances he may be able to cancel the previous order, but I doubt that such agreements would be the case for a delivery of 1.5 tons gold, and if they were, the restocking fees would probably make switching vendors that late in the game prohibitive)
If you want an interesting exception that proves the rule, check out Laidlaw v Organ. Interesting case where a farmer cancelled a purchase agreement after delivery, and was allowed to do so by the courts... because the agreement was negotiated in bad faith (the purchaser lied claiming to not have information about the market that he was shown later to have had)
You showing up ahead of the scheduled delivery would do nothing to invalidate the agreement.
"I opened my eyes, and everything went dark again"
A round could spend a couple of seconds executing the trades, then publish the results, add another couple of seconds for communication, and traders will still have six seconds for calculations before the deadline for the next trading round.
Do you know how your system would work? The big traders would hold their trades until the last microsecond of the time block. This would happen no matter which deadline you use.
Keep the quotes secret, you say? Well, I have some bad news for you. The big investment banks have information about the trades that go through them. They know the way the wind is blowing. You don't know that.
The longer the latency is, the worse it is for the small trader. Information ALWAYS helps.
High frequency trading helps the big guys without harming the small ones. I ought to know, I'm a private investor. I watch the prices and see big trades going through. There are times when my own trades are "big", When I buy $50000 of a small share the price may go up $0.07 as a result. I can "manipulate" the market just like the big guys do.
It's just a matter of economy of scale. If I had more capital, I could invest more, but for the capital I have it doesn't pay to squeeze 0.001% more. My broker has a wide range of tools, I pay for those that fit my portfolio, it's as simple as that.
Let the people who work the market and understand it create the rules, don't try messing with what you don't understand. Amateurs are likely to fuck up things.
One faulty algorithm accidentally dumps lots of stocks
That only harms the corporations that hire incompetent programmers who write faulty algorithms. If you have confidence in a company's business and see its price falling, what do you do? You buy. Only to sell it at a big profit after the people realize it was only a faulty algorithm that dumped the stock. Where is the harm in that? Financial Darwinism at its best!
You mean rebates. It works like this:
You want to start a new "exchange" (ECN). No one wants to trade there - why would they, there isn't anyone buying or selling there: no liquidity.
You come up with an incentive fee schedule that will encourage market makers, and liquidity providers:
In every trade there is a passive and an aggressive side. Charge the aggressive side a fee (almost all exchanges do), but then rebate some of it to the passive side (almost always a market maker).
Hence, companies can make money by providing the market making service to the new exchange. Traders are encouraged by plenty of liquidity and low fees (compared to the existing exchanges). The liquidity is there because of the incentives.
Note that market making is very risky: leaving passive orders around the top of book is dangerous - when stocks change in value aggressors "sweep" the book, which is expensive for a market maker. The make a very small amount from most trades, but can lose it all on a single sweep.
They have to be very low-latency to make it profitable.
And yes, it's a service. Good luck running an exchange without market makers. Why would anyone submit orders to your empty books? What quotes would you publish?
2009 was a high point in HFT in equities - I know what I'm talking about here. Trading took a huge hit due to the economy. Lower trading means less money for HFT. HFT makes money from busy markets, high liquidity and moderate volatility.
The same as any programmer who writes code for war toys and eavesdropping systems. The street whore is at least honest about what she's doing, and the damage she can cause is pretty limited.
"Think about how stupid the average person is. Now, realise that half of them are dumber than that." - George Carlin
Because they make the rules. They pay Congress. They get what they want. Its why their income has increased and most everyone else's income has not. Its why they made a profit in the last economic disaster. Its why they were bailed out knowing they would need to be bailed out. Its why they made a profit on being bailed out. Its why they all made bonuses on the fact they "failed." Its why Congress has blocked three calls to investigate and punish the people responsible for violating the law.
Seriously, if you want to know who actually runs the would, look no further than financial institutions.
This article seems to disagree with you:
http://www.ft.com/cms/s/0/d5fa0660-7b95-11de-9772-00144feabdc0.html#axzz2ElVkh9ow
"Beyond rebates, another key concern is the practice of flashing prices, which helps market makers or investors discover where others want to buy or sell stocks. This practice is widely used by high frequency traders and is allowed by BATS, Direct Edge and Nasdaq OMX, while NYSE Euronext has been a vocal critic against the practice."
This was an older article, but still... What do you say about this?
It simply doesn't matter where the market goes unless you buy or sell while it's going there. If you're trying to make money on minute-by-minute trading, you'll be beat bet those doing millisecond-by-millisecond trading. But if you're saving for retirement you can ignore all that. I found the "flash crash" amusing, despite having my life savings in securities affected by it. Bit silly, really.
Socialism: a lie told by totalitarians and believed by fools.
Congratulations, great analogy! And I wonder, how is this legal?
While it is traditional for Slashdot comments to be filled with twisted and pointless car analogies, there really isn't any law against good ones.
So the way I have heard HFT explained is:
Trader 1 asks to sell Xsomething at $1.
Trader 2 asks to buy Xsomething at $1
Before their trade can go through, the HFT system immediately buys trader 1's Xsomething for $1.01. It then immediately sells that stock to trader 2 for $1.02.
Thus the HFT system has increased costs for everyone, while increasing this "middlemans" worth because he is physically closer to the exchange and can intercept legitimate orders as fast as light. Should proximity to the exchange give you a license to rip people off?
So explain please if this is not how it actually works, or why this should not be illegal.
Con men and scammers always try and work as fast as possible on their mark, lest they be discovered. If its as above board as you say, they should have no problem waiting 5 seconds before doing their business. If they can't wait, its a scam.
As a potential lottery winner, I totally support tax cuts for the wealthy
In your example, Trader #2 wouldn't agree, since $1.02 is over his budget.
Here's how it really works.
All market participants send their orders into the exchange. For simplicity let's stick with limit orders: A limit order is like a budget: I'm willing to pay up to $x for stock y, or I'm willing to sell stock y for as low as $y.
Ignoring the open, since it complicates things, during the day all the limit orders are resting (passively) on the book. Generally these passive orders are submitted to the exchange by market makers. In liquid stocks the best buy will be 1c below the best sell - in other words trader P is willing to but at or below prise $X and trader Q is willing to sell at or above $Y and Y - X = $0.01. Since the exchange cannot fulfill those orders by matching them they must rest on the book.
Now enter an investor - or actually his broker. He wants the best possible price. Suppose he is buying. In order for him to get a trade, he must be willing to pay at least the minimum sale price - in the example above that would be $Y. If he submits lower than that his order won't trade. If he submits higher he gets price improvement and still matches the best price available of $Y.
The exchange cannot match at worse prices than the best bid and ask - and there is a national best bid and ask (NBBO) to protect people.
Where does HFT come into this? He's usually P and Q. He's the passive trader. And if you simultaneously submit a 1 lot market order buy and a market order sell for the same stock you will lose $0.01 - this is how the market maker makes money.
There is no HFT between you and the exchange.
Note - the market maker is actually taking a significant risk. These prices can change rapidly. When they do, aggressive traders send "sweep" orders, which just means they can match several price levels. The exchange matches the market maker's order with the sweep, but the value of it has changed, and the market maker loses a significant amount of money. They avoid this by trying to adjust their prices as quickly as possible.
Also - without the market makers you'd have an empty book - and no one to trade with.
Make things harder/slower/more expensive for the market maker and the spreads widen - meaning it costs you more to trade. They call this inefficiency.
You actually see this in other markets - such as government bonds where they have "work-up" which is very much like a minimum hold time. They are much more inefficient markets - treasuries are expensive to trade partly as a result.