Undiscovered Country of HFT: FPGA JIT Ethernet Packet Assembly

michaelmalak writes "In a technique that reminds me of the just-in-time torpedo engineering of Star Trek VI: The Undiscovered Country, a company called Argon Design has "developed a high performance trading system" that puts an FPGA — and FPGA-based trading algorithms — right in the Ethernet switch. And it isn't just to cut down on switch/computer latency — they actually start assembling and sending out the start of an Ethernet packet simultaneously with receiving and decoding incoming price quotation Ethernet packets, and decide on the fly what to put in the outgoing buy/sell Ethernet packet. They call these techniques 'inline parsing' and 'pre-emption.'"

Comments

Wow,

[Antony T Curtis]

This is the madness of high-speed trading...

Re:Wow,

[Anonymous Coward]

High speed trading is all about stealing as much money as quickly as possible before anybody else has a chance to do it.

It serves no purpose but to move money from the hands of everyone else to the banks -- the same banks that caused the financial mess in the first place.

I blame this squarely on the American concept of capitalism -- the Republicans and Libertarians will tell you this is how it's supposed to work, because they and their benefactors directly profit from this.

The super rich just skim off the top and bypass the entire 'market' for their own purposes.

And this is why there never has been, and never will be a free market and it can't do what it claims -- because someone will always game the system for their own benefit, and there's nothing to keep them in check. And the big players define the market choices, so there is no actual options for people.

I view HFT as wholesale theft, which is pretty much exactly what it is. Nobody earned anything, they just have a direct hook into the system whereby they can bypass everything and make money before it exists to anybody but them.

Burn Wall Street. Eat the rich.

Re:Wow,

[Anonymous Coward]

At least porn is of arguable value. HFT brings absolutely nothing of value to the table. It doesn't help the traded companies, it doesn't help the market, it doesn't help any country economies. In fact, all it does is give the same hedge fund bozos who trashed the US and EU's economies another way to scarf income without adding anything.

Markets need to have some sanity. Either only allow trades each 15 seconds or tack a very small surcharge per transaction which wouldn't affect normal transactions, but penalize HFT enough to not make it worth the bother.

Re:Wow,

[Anonymous Coward]

That's right!
I understand that none of the Democrats will have anything to do with WallStreet.
Heck, not a single one of them owns any stocks from what I hear.

Re:Wow,

[dintech]

However, no-one ever wrote a trading platform on MacOS.

Re:Wow,

[gmuslera]

The madness goes above it. In a system where the ultimate good is money, going all for it is a reasonable move. Making dedicate machines that make money as fast as possible is a good approach. The madness there is that the ultimate good is money (for everyone, even the ones that make the laws), more than human life or that mankind or civilization have a future.

Re: Wow,

[smaddox]

Why only 15 seconds? Why not 24 hours? What reason, other than gaming the system, could there ever be to hold a stock for less than 24 hours? I don't understand why this wasn't made illegal 30 years ago... Well, I do - the people making the laws are the people profiting from them - but the reason is not a good one.

Re:Wow,

[vux984]

I agree with you, but go further.

HFT brings absolutely nothing of value to the table. It doesn't help the traded companies, it doesn't help the market, it doesn't help any country economies. In fact, all it does is give the same hedge fund bozos who trashed the US and EU's economies another way to scarf income without adding anything.

HFT isn't merely neutral adding no value; the income they "scarf" is income the rest of the stake holders lose. (To the extent that one can lose something one never got, at least.)

Either only allow trades each 15 seconds

I propose 10 minutes or even longer, and even that's more than fast enough. A company's fundamental value doesn't change 6 times an hour.

10 minutes lets news hit, lets people think and consider what they value the stock at, and even people not day trading for a living can react and put in a trade order without being 100 million trades "too late".

or tack a very small surcharge per transaction which wouldn't affect normal transactions, but penalize HFT enough to not make it worth the bother.

Not just every transaction -- every ORDER. HFT spams millions of orders to probe, guide, bait, etc, most of them never close and are cancelled; within milliseconds of being placed.

Those need to be 'taxed' as well.

Finally eliminate "dark pools". All trades MUST go through regulated markets. There should be no dark pools of unregulated trade.

Re:Wow,

[ggraham412]

Put everybody's orders in 15 second time buckets and match randomly? Here's a fictionalized rendition of how that would go:

Let's see, we have 1000 shares of APPL for sale at the bargain price of $485. Who gets these shares ... sold to JP Morgan Chase!

And we have 1000 shares of GOOG for sale at the bargain price of $879. Who gets these shares ... sold to Goldman Sachs!

And we have 1000 shares of IBM for sale at the bargain price of $190. Who gets these shares ... sold to Berkeshire Hathaway!

Well, that's all the matches for this time bucket. John Q. Public, if you didn't get filled this time, try again in 15 seconds, and don't forget to raise your bid price!

Re:Wow,

[WheezyJoe]

Burn Wall Street. Eat the rich.

No, tax Wall Street, Tax the rich.

Why? To punish the rich for being rich? To punish Wall Street for making so much money?
No. To control the market, to put a disincentive to trading for trade's sake and locking up capital in the hands of a few until they come to control the market itself.
After the last Great Depression, people realized that Wall Street will always go out of control, eventually. We've forgotten those lessons, and removed the regulations that kept Wall Street boring (it sure wasn't sexy to be a banker in the 70's) and kept capital where it belongs: industry.

Under those old rules, Wall Street made money by performing financial services, and thus sharing in the success of industry, but otherwise sat on the sidelines.

Trading for trading's sake, however, is simply buying low and selling high. No matter how complex the instrument, it all boils down to buy low, sell high. And therein lies the rub; somebody has to lose.

Yep, there has to be a loser. One of the parties in the trade is going to get something that's worth less than they think it is, and the other's going to profit from it. Arbitrage, for example, is where some poor fool is offering more money to buy something than some other poor fool is selling it for. Wall Street swoops in, buys from the one and sells to the other, banks the difference. Free money! Too bad the two fools couldn't have found each other on their own... both paid/received the wrong price.

HFT only facilitates one bank making the deal (getting at the sucker) quicker than another. And the higher the speed, the less thinking the other party has to consider whether the deal is any good or not. Assuming that the first party can think that fast, which they probably can't. But they can't appear to be trading with yesterday's tech, can they? Otherwise, people will consider them out-dated, and target them for a sucker.

Buy low, sell high. I know this stack of Mortgage Backed Securities is worthless, but you haven't heard the news and I'll tell you it's great and you have 15 seconds to make the trade or it's going to someone else. That's right, little fish, take the bait.

Re:Wow,

[fh8734]

HFT provides liquidity, and liquidity is of the utmost importance to traders.

HFT is very misunderstood by people who don't participate in or understand trading. HFT in fact adds tremendous value to all market participants by dramatically increasing market efficiency with the significant proportion of trading volume it's responsible for.

When you trade a security, there are actually two prices: the bid price and the ask price. When you buy, you pay the ask price; when you sell, you receive the bid price. The ask price is always higher than the bid price, with the market makers keeping the difference. This means that if you buy a stock and immediately sell it, you lose this difference--this is known as slippage. When there aren't many trades occurring, these prices widen out, and the high degree of slippage makes trading profitably much more difficult. With markets as efficient as they are now, which is largely due to HFT, these spreads are often a single penny wide. Before HFT, these spreads were often ten, twenty, or more times as wide.

Anytime you want to buy or sell something, it's highly desirable to have a line of people willing to make you an offer. High frequency traders are these people. It doesn't matter why they want to take the other side of your trade. All that matters is they are there enabling you to make trades more easily and at better prices.

Getting rid of HFT would be like going back to the dark ages when everyone was being ripped off by market makers.

Re:Wow,

[jbmartin6]

HFT brings absolutely nothing of value to the table

That is your opinion. Fortunately for the world, everything that happens isn't subject to your opinion. The owners of the exchanges see value in it or else they wouldn't bother supporting it. Perhaps that is of no value to you, this has no relevance to whether or not others value it.

all it does is give the same hedge fund bozos who trashed the US and EU's economies another way to scarf income

Hedge funds and HFTs aren't the same people. Citation please on hedge funds trashing economies. I'm willing to bet there is no evidence for this opinion.

allow trades each 15 seconds

Have you seen the activity that goes on now on the microsecond that fed announcements are released? Simply moving the border around isn't going to change the game much.

Re:Wow,

[Anonymous Coward]

HFT provides liquidity, and liquidity is of the utmost importance to traders.

Liquidity? And efficiency?You actually believe that bullshit? It's not about liquidity, efficiency, market making etc. It's all about transferring money from other people to them.

And that's of utmost importance: http://www.zerohedge.com/news/2013-05-08/jp-morgan-has-zero-trading-losses-first-quarter
When you can do it with zero trading losses day after day it's almost like a tax you impose on everyone else (guess where their money comes from).

If the market is becomes more efficient as you claim why'd would these parasites be raking in big bucks? They'd be raking in smaller and smaller bucks instead. Think about that.

And they get bailouts and transaction rollbacks, trading pauses whenever they screw up big time.

When Joe Sixpack trader screws up, nobody bails him out or rolls back his transactions. And if he outsmarts an algo he risks getting a prison sentence: http://www.computerworlduk.com/news/security/3244186/norwegian-traders-convicted-for-outsmarting-us-stock-broker-algorithm/

Reality is it's about the rich and powerful continuing to transfer wealth from the less rich and less powerful.

Re: Wow,

[jd2112]

Even inserting a delay of 15ms across the board at the end points might be enough to limit the effectiveness of HFT.

Re: Wow,

[Spazmania]

Hear hear! All it would take is one law: you may not both buy and sell a stock or option in the same 24-hour period.

Re:Wow,

[Spazmania]

I'll take the dark ages. The market makers were more transparent and, well, honest about ripping me off. And ultimately they ripped me off for less.

Re:Wow,

[defcon-11]

Whatever you think of HFT, this tech sounds awesome and may have other interesting applications.

Re: Wow,

[ShanghaiBill]

Why only 15 seconds? Why not 24 hours?

You seem to have a rather astonishing ignorance of how markets work. High Frequency Traders (HFTs) are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade. They make a profit on the spread between the buy price and the sell price. The problem is that once they locate the buyer and seller, they need to buy the stock from the seller first, then turn around and sell it to the buyer, but the buyer may have cancelled the transaction, or they may have already bought the stock from someone else, in which case the HFT is stuck with the stock and may have to sell it to someone else at a loss. If transactions are granulated to even one second intervals, instead of say, millisecond intervals, then the risk of this happening is a thousand times higher, and the HFTs will insist on higher spreads, resulting in lower liquidity and higher transaction costs for both buyer and seller.

Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money. The only losers are the old market makers that used to have lucrative sweetheart deals with the exchanges. Many of those old market makers are now bankrupt. Good riddance.

What is your objection to high frequency trading? What is wrong with it? Other than people ranting about something they have made no effort whatsoever to understand, I haven't seen a single good argument against it. The advantages, to nearly everyone, seem pretty obvious to me.

Re:Wow,

[Anonymous Coward]

The owners of the exchanges see value in it or else they wouldn't bother supporting it.

Of course they see value in it and support it -- they're doing HFT trading too.

All you've identified is that the rich assholes and corporations who run this are all in agreement.

HFT brings no value to the table other than the large financial entities which are profiting from it. It's pulling money out of the market at the expense of everyone else, and for the benefit of the financial institutions. Of course they're fucking well in favor of it, it makes them huge amounts of money they skim off the top.

Dictators see value in dictatorship, because they benefit from it. That doesn't make it better.

Re:Wow,

[cazzazullu]

If you allow trades only every 10 minutes instead of continuous, you will end up with a whole lot of additional problems, and the big players will take advantage of it again anyway. Let me explain.

First of all, the "price" of a security is the price at which the last transaction happened. Normal people like me and you consider this "the price" of that security if we want to buy it. Suppose you want to buy a security at a certain price. You give an order out, buy 10 shares at price X. If a sell order for shares at price X exists, these orders are matched up, and depending on the sizes of the orders, executed partly or completely. These order are public knowledge, and the order books are visible: I can see that there are 1000 shares bid at price X, 900 at X-1, 789 at X-2 etc..., The same for the ask, so many shares at X+1, X+2, and so on.

Several algorithms use this knowledge. If I want to buy a gigantic amount of a given stock at once, I will be forced to buy the 1000 shares that are offered at X, then the next 900 offered at X+1, etc., so I will end up paying way more than X on average. The final price paid will be "the" price of the security after my buying spree, and will be significantly higher than X.

Now how can you make this work with 10 minute trading intervals? Normal people can't find out the current "price", since the last transaction was 10 minutes ago. You could look at the bids and the offers, and their volumes, to get an idea of what the price might be in the next trading slot, but these bids and offers can be made and cancelled within milliseconds. If I bid X, and see an offer for X-1 appear, I can cancel my bid, and bid X-1. It would be stupid otherwise.

HFT firms will still run their algorithms, manipulating these orderbooks to steer the price, and putting in bids in the very last millisecond. It might end up being even more profitable for them, since all the "sheep" that cannot trade so fast, or god forbid, use a keyboard to enter trades, will be fleeced even more: Now you see an order come in, you quickly frontrun it and make one cent of gains (before someone else is able to react). In a 10 minute system, you see order coming in, and have plenty of time to manipulate and steer the price before the orders will be executed.

Re:Wow,

[AlphaWolf_HK]

It adds nothing? You certain about that? It seems to me that HFT has been pushing technology to bring about lower latency networking. TFA alone is the first example I've seen of layer 7 switching. As somebody who eats, breathes, and shits networking I find that rather impressive.

I don't get why it's so popular on slashdot to bash high frequency trading. If the pornographers want to film porn, let them film porn. If the gamblers want to gamble, let them gamble. If the high frequency traders want to trade, let them trade. Why do we feel the need to stop somebody from doing something that doesn't hurt us?

Re: Wow,

[Anonymous Coward]

High Frequency Traders (HFTs) are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade.

No, a market maker is an entity willing to buy or sell an issue when others won't. That entity makes or creates a market where one would otherwise not exist.

An entity that matches buyers with sellers is usually called an Exchange. Exchanges usually make their income from a commission paid by the buyer and the seller. The distinction between taking their profit from a commission and from simply keeping the 'spread' is important: if the agreed price is the same for the actual buyer and actual seller, then it probably represents a fair estimate of the actual price, and the participants know how much the exchange costs. If the seller sells for less than the buyer buys, then the fair price remains unknown and both buyer and seller have paid an unknowable fee for the privilege of exchange.

Re: Wow,

[Anonymous Coward]

Just make the tax rate on trades inversely proportional to how you've held the item you're trading.

As time approaches zero, rate approaches 100%.

Re: Wow,

[__aayhdn3968]

This law already exists to "protect" people: https://us.etrade.com/e/t/prospectestation/help?id=1307030000#Learn While not exactly the same ($25k will clear you from the regs) it definitely does knock a dent in the scalpers.

Re:Wow,

[__aayhdn3968]

now what good is "per-process memory protection" in a sealed system and how is that a requirement for algo trading systems? My framework is running across *nix machines, both linux and mac with zero issues.

Re:Wow,

[ShanghaiBill]

And ultimately they ripped me off for less.

This is flat out wrong. Transaction costs have gone down by an order of magnitude since HFT became common. Claiming that HFT increases costs doesn't even make sense. If that were true, why would anyone trade with them?

Re:Wow,

[dwpro]

The problem you mention does not seem intractable. Getting an average of the trades from the last interval would give me a good idea of what to bid/offer on the next round, and some semblance of honest brokerage would prevent the sort of millisecond gaming you mention, a hell of a lot better than the crap shoot I have right now where timing a buy is like pinning the tail on a bucking mule. Synchronized resolution of bids/offers at intervals with some sort of equitable resolution for bids ranges seems quite do-able to me.

Re:Wow,

[LordNacho]

I've worked with actual market markers, who traded both old school and electronic.

It's pretty clear what they thought was more lucrative. Find the right guys in the City or Chicago, and they'll regale you of the good old days, where brokers would get different coloured papers for buys and sells, prices would be quoted 10 ticks against the customer, etc. Nowadays you can't even sit in the same room as the people you're colluding with.

Re:Wow,

[mbkennel]

It's actually different hedge fund bozos. In the boom and crash, it was banks and originators who perpetrated most of the fraud, quite different animals than hedge funds and with much more political power.

Exchanges like HFT because they get paid more.

Re:Wow,

[garyebickford]

This has been argued many times. You have to look at the total picture. The early huge gains from HFT were because it was a new technology, and there was a tech bubble around it (which coincided with some other bubbles, but that's aside the point). Now essentially every significant institution is doing it, and most of the pure-HFT entities are having trouble making any money because the spreads have shrunk ever closer to zero - that is a good thing in general, as it moves the market ever closer to the ideal they talk about in Econ 101 - any new piece of information that comes into the market is quickly incorporated into the pricing, and the 'ringing' that used to occur is damped out quickly by opposing 'traders'.

This has become so effective that, except for unusual events like an announcement about a particular company or market segment or political situation or whatever, nearly all individual stocks (outside penny stocks etc.) follow the macroeconomic situation in parallel.

Even when a big mistake happens, between the opposing algorithms 'covering' each other by buying or selling counter to each other and the various mechanisms put into place to short-circuit sudden anomalies, those anomalies are sorted out within minutes. Back in the old days an anomaly could take hours, days, weeks or years to get fixed.

HFT (and related tech) also makes it possible for Schwab, for example, to allow you to buy, sell or hold 153.73215 shares of a stock, because your 'trade' is nearly always executed solely within the Schwab computer system and never sees the real market - the Schwab computer system bundles your virtual trade with others to drive their HFT algorithm to actually buy or sell as required.

TL;DR - HFT just makes the approximation of the market to the macroeconomic situation less digital, closer to the 'true' analog state, and makes it easier for everyone to participate.

Re:Wow,

[AlphaWolf_HK]

If the pornographers want to make porn, they don't change the price of my ticket to "Prisoners." If the gamblers want to gamble, it doesn't change what I pay for admission to Six Flags.

What does that have to do with the price of cheese in Timbuktu?

HFT makes money because actual people sell a stock for less than the actual buyer pays.

And that's bad because?...I think if you don't like markup or fully automated transactions, your best bet would be to protest places like Amazon, Best Buy or...hell, probably even Whole Foods. These places have computer systems that place orders without human intervention, and "skim off the top" in the process.

When the buyer ultimately makes the decision to buy, they already know what they are paying, and they are paying what they feel it is worth. If they didn't feel it was worth it, they wouldn't buy it. If they were being billed for more than they agreed to pay, THEN there would be a problem - however that isn't the case.

Re:Wow,

[Spazmania]

When they were done ripping me off for my trade, they didn't continue to sap value from the company whose shares I owned.

HFT's rake it in. Where do you think that money comes from?

Re:Wow,

[vux984]

No, your methods all assume things that would not be true.

There would be no placing and cancelling orders in milliseconds. The market resolution is 10 minutes. There would be a fee for placing an order, and once placed it would not be cancel-able until after the next interval because THAT is the market resolution.

The orders go into the black box at the exchange, and every 10 minutes they get matched.

The order depth on bid/ask etc would just be what's still in the queue that didn't execute 10 minutes ago. And that's still going to give you a very good idea what the price is. Like a thinly traded OTC for example... where bid and ask are usually within a nickle until someone comes in and either buys at the ask or sells at the bid.)

Think of it as the "clock" only ticks every 10 minutes; there is no "real-time" game taking place between the 10 minutes. *Nobody* gets information faster than once every 10 minutes. There is nothing to 'game' in the interval because there's NOTHING to see in the interval; nothing happens. You are between ticks of the clock.

Re:Wow,

[tristes_tigres]

It certainly can, and very easy too - simply withdraw legal, regulatory and insurance coverage from "dark pools". Those who would sill want to gamble there - let them handle the risk without any freedom -endangering state interference.

Re: Wow,

[hermitdev]

You are ignorant. An Exchange is more like a market place, where buyers and sellers come to meet and prices are posted. A market maker is more like a person trolling the marketplace looking for people people to buy or sell that can't find their match. For a haircut, the market maker will buy (or sell) your goods, holding temporary possession, with the expectation they can quickly find someone to dump the deal onto (for another haircut).

Market makers are *needed* by exchanges and are often given preferential treatment. However, if for some reason, such as a software failure, market makers can be fined by the exchange for not meeting their obligations. The fines can easily be $10,000 per minute, depending on the exchange and regulating authority.

Re:Wow,

[Roachie]

Wait ! think about it 15 seconds? Prices can change a lot while you are waiting 15 seconds for an order to go thru... as a matter of fact I would submit that the same hedge fund bozos would love it if you had to wait that long. The HFT adds liquidity to the market, meaning that when you see a quote the chances of you closing at that price are increased AND to some degree they help to ensue that you CAN sell.

Re:Wow,

[vux984]

But you can't regulate the trade of tomatoes for milk. It won't work, and you can't build enough guns or hire enough thugs to make it work. Ever. So don't even try.

The dark pools I refer to are informal stock markets run internally to brokerage houses, or between brokerage houses outside the actual regulated exchange.

Thus for example if jp morgan wants to buy shares of X, it can do so on the exchange or it can just go and make a deal directly with with Chase bank bypassing the exchange. If a jp morgan customer wants to buy shares of Y, jp morgan doesn't have to forward that order out to the exchange -- it can just sell them some of its own, perhaps that it got slightly cheaper by buying them directly from chase bank... while still charging the customer the market price instead of the price it actually obtained them at, and all kinds of other stuff.

That should all be eliminated.

But it has nothing to do with the barter of tomatoes and milk.

Re: Wow,

[Roachie]

ANNNNNNND .... then you will complain that the the crooks force the quotes toward zero while you sit helpless for 24 hours.

Think about it.

Re:Wow,

[ShanghaiBill]

HFT's rake it in.

They rake in far less than the old market makers that they replaced.

Where do you think that money comes from?

The money comes from reducing transaction costs, which comes from the reduced risk of holding the stock for a shorter period of time. The buyer wins. The seller wins. The HFTer wins. The old market making system loses.

Re: Wow,

[alexander_686]

No, a market maker is an entity willing to buy or sell an issue when others won't. That entity makes or creates a market where one would otherwise not exist

You are half right. It is a exchange helps match buyers and sells – it creates the market. It seems that you are assuming that the buyer and seller are at the market at the same time which they rarely are. A Market Maker (who is usually not part of the exchange) solves the time issue – having an inventory of stock that they buy and sell. Even Aristotle recognized the virtue of middle men. Why should a farmer wait all day in the market waiting for a buyer for their goat? They have better things to do. Sell to a middle man.

A good market should have both breadth and depth. That is lots of people on both sides of the trade (breadth) even during extreme price swings (depth)

Over the past 20 years the explicit costs have fallen by 90% thanks to spread compression. What is more impressive is that implicit costs have fallen by more than 60%. The breadth of the market has greatly expanded.

If you want to hurl a criticism at HFT you might get away with depth. There were times during the financial crisis that HFT were losing money so they just turned off their computers. Traditional market makers would always have to make a market. Of course they were guaranteed a $.125 profit on every trade they made .

Re:Wow,

[Anonymous Coward]

I think if you don't like markup or fully automated transactions

And if you love markup so much, then you have no trouble with people going to the grocery with you and snatching up the food you want a millisecond before you grab it, then offering to sell it to you at a penny more than what the grocery is selling it for. You could try reaching for a different apple, but they're faster than you every single time.

So, do you just put up with it and pay the penny? Do you say "this guy is an asshat who needs to get out of my way rather than trying to skim a penny off the top of my transaction?" Or do you say "this guy is performing a valuable service in assisting me in buying apples, and without him I'd never be able to find an apple for sale at the grocery store! How did we ever operate grocery stores for hundreds of years without this service?"

Re:Wow,

[alexander_686]

Two points.

First, dark pools are not informal. Most are independent and all have a formal structure.

Second, I doubt many people are being taken by dark pools. Let’s ignore the broker’s fiduciary duty. Only large illiquid orders are put though. Generally only large sophisticated institutions make these types of orders. Generally they monitor the trade quality – both explicit and implicit factors. A unscrupulous broker might be able to get away with it once in a while.

Re:Wow,

[alexander_686]

What you are describing is call “Order Book” exchange. They were common in the past but now are limited to thin illiquid markets.

The Paris Bourse was one. The problem was dual list stocks – stocks that were listed both on a “Order Book” exchange and a “Quote Driven” exchange – the Quote Driven exchange always offered better trading – smaller speeds, deeper markets, etc. The problem is that it is harder to be a market maker in an order books system so you get a narrower shallower market.

Re:Wow,

[alexander_686]

Just so you know this is not the widely accept wisdom.

For every study that you can haul that that shows that HFT increases volatility I can haul one out that shows it doesn’t. The problem is a classic correlation does not equal causation. Has volatility increased as HFT entered the market – yes – but the underlying fundamentals and risk were also increasing. I have also seen studies that figure most of the increase in volatility is due to uncovered volatility.

I think – because the definitive word is not out yet – that volatility has gone down during normal period but increase during those rare stressful periods.

Re:Wow,

[vux984]

Thanks for that information. I think the main counterpoint though is that modern computer systems and global reach of the internet basically render the need for dual listed stocks obsolete.

The only real point now is convenience and access to foreign retail markets (eg. canadian stocks that like to be dual listed on the TSE along with the NYSE for better exposure to american markets), and we could easily support listing stocks on multiple exchanges but have the orders for 'non-home' listings still all be forwarded and processed by the home exchange.

The problem is that it is harder to be a market maker in an order books system so you get a narrower shallower market.

The real challenge is convincing me that this is really a "problem" at all. :)

Re:Wow,

[vux984]

First, dark pools are not informal. Most are independent and all have a formal structure.

Fair point; I didn't mean to suggest they weren't structured; just that they were invisible to the public and unregulated. There is no legitimate reason for them to exist. If large illiquid orders are being made, there is an advantage to the pool operator and participants to be aware of it, and advantage other people do not have, and that undermines the proper functioning of the publicly traded market, where transactions are supposed to be public.

Stats for 2010 put 10%-12% of all market volume in dark pools. That's quite a lot of activity. More over the private pools between brokers were to bypass exchange fees and the split difference -- essentially creating new sources of revenue by bypassing the system everyone else had to use again contrary to the public interest.

Re:Wow,

[ShanghaiBill]

That should all be eliminated.

Two questions:
1. Why?
2. How?

If a brokerage clears transactions internally, that is more efficient than using an external exchange, and is a good thing.
Trying to outlaw or over-regulate dark pools will just push them underground, or more likely, overseas. That means less jobs for Americans, just to satisfy your pointless desire to ban something that you don't understand.

Re:Wow,

[vux984]

If a brokerage clears transactions internally, that is more efficient than using an external exchange, and is a good thing.

1. Why?

No, its not. A brokerage doing that gets inside information about demand for a stock not made available to the public. Indeed part of the whole HFT game is probing dark pools for invisible supply/demand to help them predict the direction things are going to go. You can't possibly sit there with a straight face and tell me giving the brokers participating in that game that access to information like that is a good thing that benefits the market.

Any the "efficiency" gains realized are mitigated by the damage the above causes coupled with the fact that the average investor doesn't benefit from those efficiencies -- Blankfein just takes them home in his pocket. That's hardly a benefit to the market.

Trying to outlaw or over-regulate...
2. How?

Just treat shares like stock certificates literally. Sign them at the exchange with who they belong to - if they change ownership, that change needs to be signed by the exchange via trade executed by the exchange. A brokerage can't so easily bypass the exchange effectively if it literally can't change the ownership of a share without the exchange.

Yeah there's a lot more to it than that, and more attacks, and more ways to head them off. Sorry a complete implementation strategy for a fully functional stock exchange isn't going to fit in a slashdot post.

just to satisfy your pointless desire to ban something that you don't understand.

I'm not sure you understand them.

Re: Wow,

[dave562]

Plenty of reasons to hold a stock short term. Not milliseconds short term, but less than a day. Let's say that you are an old fashioned investor and you find a company whose product you like. Wanting to support them, you purchase a bunch of their stock. Later in the day, some horrible news comes out about their CEO selling small children into sexual slavery.

I am sure that you can easily come up with many other, just as feasible scenarios where you might want to get rid of a stock that you recently purchased.

Re:Wow,

[dave562]

If I want to sell a stock to my friend over my coffee table, who cares? Regulation is important, but at a certain point, it gets to be burdensome. Nobody is forcing people to use dark pools. They are there because they provide a benefit to the people who participate in them. Does it really matter what people buy and sell for via those venues? If so, please explain to me why.

Re:Wow,

[complete loony]

Buyers and Sellers create orders at various prices and lock them in, but the order is initially hidden from everyone. After the order has existed in the system for 2x interval it is published. Attempting to cancel an order has a 1 interval delay. Every interval, if buy and sell orders overlap, match up trades. Resolve the imbalance between buyers and sellers by picking the winning trades randomly. Add a bias to the randomisation process to prefer smaller quantity orders.

Since there's a delay between publishing and finalising trades, a stock with a high volume of trades is likely to have overlapping buy and sell orders almost all the time.

Re:Wow,

[ShanghaiBill]

A brokerage doing that gets inside information about demand for a stock not made available to the public.

This makes no sense. The brokerage already has the information. They are the insider.

Re: Wow,

[dbIII]

are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction

Thus, in a term most readers here will understand, a man in the middle attack to the detriment of those with slower communication systems.

Now that I've made it so clear you no longer have any way to pretend to be confused as to why we don't like it.

Re:Wow,

[dbIII]

don't get why it's so popular on slashdot to bash high frequency trading

We've got an inbuilt disgust of man in the middle attacks.

Re:Wow,

[fh8734]

Liquidity? And efficiency?You actually believe that bullshit? It's not about liquidity, efficiency, market making etc. It's all about transferring money from other people to them.

If you carefully read what I wrote, you'll see I never said HFT is about liquidity and efficiency. I merely said HFT provides the market with the liquidity and efficiency. High frequency traders are motivated by money just like all market participants. People don't go to medical or law school to heal the sick or defend the innocent. They do it for the money, but that doesn't mean they don't occasionally heal or defend people.

High frequency trading is not like shooting fish in a barrel. Despite what the media would have you believe, trading of any sort is not easy, and HFT is no exception. High frequency traders are not out to get you. They're just out to make money in the market like all market participates. I'm convinced most of the media folks who bash HFT, really don't have a clue how HFT or the market works. They just think jumping on the HFT bashing bandwagon makes them sound smart. The unfortunate thing is their readers and viewers don't know how ignorant these commentators are and end up believing their nonsense.

Whether or not you want to admit it, financial markets are more liquid and efficient today than they've ever been, and HFT has a lot to do with it.

I encourage you to watch the video linked below to better understand HFT's effect on the market. Sosnoff knows his stuff.

https://www.tastytrade.com/tt/shows/weyg/episodes/130808_weyg

It really is unbelievable how much bad information people consume and believe concerning HFT. I challenge you to find one concrete instance where HTF has hurt you as a retail investor or trader.

Re:Wow,

[bondsbw]

to put a disincentive to trading for trade's sake

The whole point of public trading is to trade for trade's sake.

Don't take this as a criticism of your words; no, take it as a criticism of the concept of public trading. Real private investment in a company for the long term keeps the investor engaged and reduces the expectation that high margins must be made every quarter. Many of the best products are the result of draining the bank in R&D, reaping the rewards years later.

But trading at such a fine-grained level as public stocks (both in quantity and time) is so removed from the company that its relationship to real profitability is practically nonexistent, replaced with the appearance of immediate profit to the detriment of long-term success.

Nevertheless, public trading is just great if you're a stock trader. Your job is to suckle at the teat of a company while it's delivering the good milk, and then move on to the next when the milk begins to turn sour.

Re: Wow,

[tolkienfan]

Trading on exchanges (HFTs bread and butter) is highly regulated.

Re: Wow,

[tolkienfan]

HFT algos are mostly well understood.
It's execution which is hard... there is so much competition - which is exactly as it should be.
HFT orders are just like anybody else's orders: they show up in market data and the trades are published... it's all public information.
Anyone could start doing hft, given a reasonably small fund to start with, excepting felons.

Re: Wow,

[tolkienfan]

HFT market making is responsible for the penny spreads you have today. Go back before HFT and you find 20 times the spreads. That's a cost to trading.
The HFT company makes a much smaller amount on each trade, but as a result, trading is cheaper, hence more trading occurs.
Yes HFT makes money from it. Why shouldn't they? They provide a service at a great risk. You try placing a bunch of bids and asks at 10 price levels on each side of the book for SPY and see how you fare.
Making money at market making is very hard, but losing it is trivial.
Take your ignorance elsewhere.

Re: Wow,

[tolkienfan]

If HFT is gouging how can I buy a stock for only one penny more than I can sell it at almost any time (for liquid stocks)??
And why was the difference over 20 times as much before HFT?
The market maker is charging 1c more than he is willing to sell at. So at most he can make a penny on each stock. That's the least possible (excepting exotic orders).
Yeah, that's gouging. You're SO smart.

Re: Wow,

[tolkienfan]

TRADING is a zero sum game. You want to get rid of that?
The fact is that HFT market makers keep the markets at 1c spreads almost all the time. Before HFT, the market makers kept the spreads ten or twenty times as high.

Re: Wow,

[tolkienfan]

Some practices can increase volatility, and I'd agree those are bad.
But most HFT strategies make money off of volatility, which guarantees it reduces volatility. It uses up its fuel, so to speak.

Re: Wow,

[tolkienfan]

Hardly drastic?? It's the cause for massive price plummets in the past: traders would panic and try to sell before they lost everything. Without a market maker providing the liquidity the trader accepts lower prices, further reducing prices and further reducing liquidity.
Also, with the 1c prices that market makers provide you can only be at most 1c away from the current value at the time of the trade. With the 10c or 20c spreads of the past you were paying the market maker, on average 10 to 20 times as much!
But HFT must be evil, because you say so.

Re: Wow,

[tolkienfan]

I've talked to many exchanges. None of those have any HFT division.
In fact, supporting the high messaging load is very expensive.
Yet they are happy to do so. And there is good reason.

Re: Wow,

[tolkienfan]

The choice of 24hours is arbitrary.
Why is it better than 1hour?
How does it benefit anyone?

Re: Wow,

[tolkienfan]

Many HFT companies are now officially registered market makers and are obligated to maintain bids and asks.

Re: Wow,

[tolkienfan]

Mitm might seem like it's similar to an uneducated idiot, but market making is really very different.

You have no obligation to buy from or sell to a market maker. None at all. You can trade all day on an exchange without ever trading with a market maker.
You don't even have to pay the spread. Just join the bid or the ask.

People go to market makers because they have the best prices. Best prices equals top of book. Only top of book trades. Not best price, no trade. Hence market making only makes money if they have orders at top of book. Qed

Re: Wow,

[tolkienfan]

Why the fuck would Chase sell stocks to JPMorgan at less than the market value?
Apart from being illegal, it would be unprofitable!

Re: Wow,

[tolkienfan]

HFT doesn't frontrun. They'd have to get between the customer and the exchange. HFT firms simply trade on the exchanges with public information.
You have to have customers to frontrun, and it's highly illegal.

Re: Wow,

[tolkienfan]

Your argument breaks down right here: you DON'T have to buy or sell from the market maker. He has no way of forcing you. The only thing he can do is provide the best prices.

Re: Wow,

[tolkienfan]

How is it MITM when they aren't in the middle?

Re: Wow,

[tolkienfan]

If you had it your way, how long would I be forced into holding into a declining stock?

Re: Wow,

[dbIII]

I'm sure there's an FAQ about arbitage somewhere.

Re: Wow,

[dbIII]

Please look up how these things work before laying on the "uneducated idiot" insults. Pay attention to what those vast numbers of cancelled trades are for.

Re: Wow,

[dbIII]

In case you are challenged by text here is a picture:
http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-trading.ready.html

Re:Wow,

[alexander_686]

Personally I favor light regulation but the markets do need some type of regulation. You can read Reminiscences of a Stock Operator by American author Edwin Lefèvre. It shows what the market was before regulations in 1923.

First an exchange is a nexus where many people come to meet. If a exchange blows up lots of people would lose their money and the market would freeze up. A example of this is the CDO market when AIG failed. The CDO market was unregulated but AIG was the principal trader and as such was the informal exchange.

Second there is a conflict between personal actions and the market. It may be a pain for you to print tape (i.e. disclose each trade that was done) but everybody benefits because they have a better idea of what is happening – i.e. price discovery.

Third, well, insider trading, market manipulation, etc. You want the market to be fair.

Re: Wow,

[tolkienfan]

Perhaps, you should read one.

Re:Wow,

[alexander_686]

Where are you getting your stats? I would be interested to know.

Pools tend to trade in large illiquid positions or baskets. I would assume that this would be a much lower (but more important) volume then the algorithmic traders. So that statement kind of surprises me.

Re: Wow,

[UnknownSoldier]

I'm not surprised. Man cleverly comes up with new ideas all the time to justify his greed.

Re:Wow,

[Intrepid imaginaut]

We've forgotten those lessons

No, we haven't, some politicians just got paid enough to ignore them.

Re: Wow,

[bondsbw]

Why did you purchase the stock, to make money quick or to invest in a company?

If it's the former, my way is that you wouldn't have made the purchase in the first place. Investment means taking the bad with the good.

Re: Wow,

[tolkienfan]

Would you prefer a system where you can only buy from and sell to the original issuing company? And then only make money if they pay dividends, or if they choose to buy back and at a higher price?
I personally prefer to be able to sell my share to whomever I choose. It doesn't hurt the company if I sell to a third party. Plus a company might get more initial investment if the investors know they can sell if they need to mitigate risk.

Re:Wow,

[vux984]

Where are you getting your stats? I would be interested to know.

Misc news articales on the subject.

http://www.marketwatch.com/story/dark-pool-trading-reaches-record-levels-in-europe-2013-08-12

Saying it's hit 10% in Europe

This article... says its hit 14% in the US now.

"In February, dark pools matched an average of 908 million shares per day, accounting for roughly 14 percent of all U.S. stock trading volume, according to data from Tabb."

http://www.businessweek.com/articles/2013-04-22/credit-suisse-making-dark-pools-even-darker

Re:Wow,

[pupsocket]

True, the deranged promoters of Immaculate Capitalism are all libertarian (believers) or Republican (phony evangelists), but the Democrats who are elected to give us Responsible Market Mechanisms don't have to do anything to get re-elected, so they don't.

High-speed trading, however, is symptomatic of market mechanisms doing right: arbitraging prices toward a consensus on the thinnest margins with vanishing opportunity.

The unearned money is made by operators disguised as hedge-funds (i.e., virtually all hedge-funds) who hide information from the public markets.

It has gone on so long now that the underlying pools of capital cultivated by hedge funds are private and inaccessible to people who earn a living and to our still-vacationing enforcement agencies.

Re:Wow,

[prop_trader]

The largest HFT firms are not banks. Banks have largely spun off their HFT groups, like Process Driven Trading from Morgan Stanley. They are independent firms like RenTech, Getco, Citadel, Tradebot, etc... They are not really any different then the pit traders they replaced. Pit traders paid to be "co-located" at the exchange because they could trade with "lower latency". With RegNMS HFT firms provide a valuable service making sure that the price of a security is more or less the same price on all exchanges. Many firms (like Getco) have official market making responsibilities. HFT is not theft. There are abuses, like layering, which should absolutely be prosecuted. Market making has always been about speed and always will be regardless of what rules are passed.

Re:Wow,

[prop_trader]

Why would you eliminate dark pools? BTW Dark pools are regulated markets. NASDAQ and DE both require a certain trade/quote ratio to be met to be eligible for rebates. If you want to see a lot of orders look not at stocks but at OPRA. If you don't and HFT firm to take the other side of your trade there are plenty of options available to you, including sending a market order through Fidelity. It will be internalized those evil HFT firms will simply see a tape print via the TRF.

Re:Wow,

[vux984]

Why would you eliminate dark pools?

They hide information from the public markets for the benefit of the pool participants, and thus implicitly at the expense of the public market.

Re: Wow,

[smaddox]

Okay, let me re-qualify my point. I shouldn't have implied there are never legitimate reasons for wanting to get rid of stock the same day you purchased it. What I should have said is that stocks were created for long-term investment, and that day trading and HFT are perversions of this system which effectively tax long-term investors. By implementing a minimum hold time, you could eliminate these perversions at the cost of marginally higher risk to actual investors. Since long-term investors should be basing their decisions on more than market movements, this marginal risk is acceptable.

Of course, this is hardly clearer than my original statement; it is certainly more accurate, though.

Re: Wow,

[smaddox]

Yes, 24 hours is arbitrary. I think the actual time should be a reasonable fraction of the mean time between significant market changes. And by market changes, I don't mean stock market changes - I mean actual market changes, like new products being offered, or prices being changed (not speculative prices, but real prices). The actual value of a company does not change as rapidly as the stock market valuation of said company changes. If you are not confident enough in an investment to hold it for 24 hours, you should not be making the investment in the first place.

The stock market was created to make fractional investment in corporations possible, providing otherwise unattainable capital to corporations. Day trading and HFT tax the long-term investors in said system by increasing volatility.

Re: Wow,

[tolkienfan]

HFT actually takes volatility out of the markets... most such strategies make money from volatility.
Stock prices are affected by many many things, and these things are indeed changing multiple times per second. Interest rates, currencies futures options. .. even things like changes in liquidity and volatility have an affect on prices. Other stocks... commodities. It's easy to see some of these... e.g. the price of Kraft Foods is affected by the supply of milk and pork belly futures. Since those things directly affect the profitability of the company. Other things are harder to trace out... there may be many steps involved. Practically speaking, everything of value can affect the price of other things of value.
So yeah, the value of things change all the time.
As for your underlying premise, that stocks are somehow "meant" to be held on to, it's totally false. You already admitted that the term was arbitrary. Further, there is no benefit. Forcing a third party to hold on to a falling stock is pointless: 1 selling doesn't affect the company 2 to sell there must be a willing buyer. Worse, it slows the market, and increases risk. Increased risk increases the cost of buying and selling and investing.
Such artificial inefficiencies harm the market overall.
Your trying to solve a problem that doesn't exist with a rule that would be only harmful.

Re: Wow,

[tolkienfan]

An example might help:
WidgetCo has a great product which has been selling well. Projections are good. Growth expected. Investor Andy buys 10000 shares, now he has to hold them for at least 24hrs.
Investor Bob bought WidgetCo 3 days ago.
Suddenly, there is bad news out of Europe, and the Euro takes a bug hit.
Since the currencies now favor the Euro, a competitor of WidgetCo, LeWidget out of France can undercut widget prices. Neither company has had any product or company changes, but now WidgetCo has less value and LeWidget has more.
What happens next?
Bob sells on the announcement, making a profit.
The price is falling, but Andy isn't allowed to sell.
What's the important difference between Andy and Bob that means Andy should be penalized and Bob shouldn't?
There is none. This is pure inefficiency and has no positive effect.
This is just one example to highlight a general point. External changes greatly affect stock valuations. Locking in investors only makes the investment more risky and necessarily more costly. This impacts the amount a company can raise during an IPO, and therefore has the reverse effect than you ostensibly intended - the protection of the issuing company.

Re: Wow,

[smaddox]

If a slight hit to the Euro completely reverses Bob's investment decision, then perhaps it was not a good investment. This is no different than any investment - you account for the possible risks and possible rewards and make your decision.

Yes, a holding period does add risk by reducing liquidity, but like I said earlier, the purpose of the stock market is not to provide highly liquid investment opportunities. The purpose of the stock market is to allow fractional investment in a company, and to provide companies with investment capital. If the company has close competitors, there will obviously be a risk associated with investing in said company.

And again, there is a positive effect to a holding time - it eliminates short-term traders who effectively act as a tax on the actual investors. The billions of dollars that day trading and HFT firms make each year would go to the actual investors.

Re: Wow,

[smaddox]

HFT actually takes volatility out of the markets... most such strategies make money from volatility.

Most HFT makes money by simply being a middle man. Day trading and the remainder of HFT increases volatility by producing positive feedback loops between the prices of various market valuations. They then profit from the increased volatility by getting between the actual investors.

Stock prices are affected by many many things, and these things are indeed changing multiple times per second. Interest rates, currencies futures options. .. even things like changes in liquidity and volatility have an affect on prices. Other stocks... commodities.

All of the examples you just named as "changing multiple times per second" do so because of the existence of day trading and HFT. Really, it's just the markets valuation of these things that change this rapidly.

It's easy to see some of these... e.g. the price of Kraft Foods is affected by the supply of milk and pork belly futures. Since those things directly affect the profitability of the company. Other things are harder to trace out... there may be many steps involved. Practically speaking, everything of value can affect the price of other things of value.

Supply of milk - a real example. Futures are again the market's valuation of something, but supply of milk is actually something real. So, how often is data released on the supply of milk? How much do the estimates change in a day? What about in a week, or a month? Sure, in any given day there could be a significant change in estimates, but how often do such large changes occur? What is the mean time between significant changes? Much longer than the mean time between HFT transactions - orders of magnitude longer.

So yeah, the value of things change all the time.
As for your underlying premise, that stocks are somehow "meant" to be held on to, it's totally false.

I'll give you the benefit of the doubt of misunderstanding me, rather than attempting to produce a straw-man. I did not say that stocks are "meant to be held on to". I said that the purpose of the stock market is to allow fractional investment in companies, and to provide capital for the companies deemed worthy of investment.

You already admitted that the term was arbitrary. Further, there is no benefit.

The benefit is the elimination of the effective tax and volatility introduced by day trading and HFT.

Forcing a third party to hold on to a falling stock is pointless: 1 selling doesn't affect the company 2 to sell there must be a willing buyer.

I'm afraid I don't understand the meaning of the above sentence. Could you rephrase it?

Worse, it slows the market,

Which there is nothing inherently wrong with.

and increases risk.

Which is an acceptable drawback.

Increased risk increases the cost of buying and selling and investing.
Such artificial inefficiencies harm the market overall.

But not as much as day trading and HFT.

Your trying to solve a problem that doesn't exist with a rule that would be only harmful.

I'm trying to eliminate the effective tax introduced by day trading and HFT. The cure has a slight disadvantage of increasing risk, but overall it would be a dramatic improvement.

Re: Wow,

[tolkienfan]

You completely missed the main points:
1. Bob shouldn't be penalized if Andy isn't.
2. Due to the increased risk, the cost to investing is higher. This *harms* the issuing company you are supposedly trying to help.

You say there is a positive effect to a holding time - that it eliminates short term holding. But that's predicated on your *assumption* that eliminating short term trading is a positive effect. You also say that some traders are a tax on "actual" investors. This isn't even clearly defined. What's the difference between "actual investors" and "short term traders"? You already agreed that the 24 hour term you suggested for holding times is arbitrary.

This "tax" you talk about is one market participant earning money that another wouldn't. Why do you care? I suggest it's only because it's not you.

The real effect here is that added risk increases the cost of trading, and therefore the cost of investing, and this slows growth. Slowed growth is bad for everyone.

Re: Wow,

[tolkienfan]

HFT actually takes volatility out of the markets... most such strategies make money from volatility.

Most HFT makes money by simply being a middle man. Day trading and the remainder of HFT increases volatility by producing positive feedback loops between the prices of various market valuations. They then profit from the increased volatility by getting between the actual investors.

You don't actually know how HFT makes money - that's part of the reason you assume it's bad.

Middle men can be useful. In this case market making is the closes HFT strategy to "middle man". Market making has been around a lot longer than HFT (perhaps going back to 1871 and the NYSE specialist). So here you're not even arguing against HFT.

Unfortunately (for your argument) I can easily demonstrate that market making is good and that HFT has made it better:
1. People don't have to pay the spread (unlike taxes). If buying you can join the bid, or if selling you can join the sell. So IF they trade with the market maker it's because they *choose* to and must see benefit.
2. People trade with market makers because they get the best execution. Fastest and within 1c of the best price (for liquid stocks). Joining the bid or ask doesn't guarantee you a match. This can be risky, since the price can move before you get execution - and it's not always in your favor. Indeed, if your buying it's because you think the price will rise - if you don't get execution quickly, and the price does rise, you've lost some of your earnings.
3. Market makers have the best prices. This is guaranteed because exchanges can only match at the best price. If they weren't at the best bid or ask they wouldn't get trades. No trades means no profit. Note this is best prices *across all exchanges*. See NBBO
4. Before HFT, market makers kept the spreads at 10c or 25c. HFT has (thru simple competition - the specialists had almost no competition) significantly improved this - by 10 to 25 times! Your broker charges more!

Stock prices are affected by many many things, and these things are indeed changing multiple times per second. Interest rates, currencies futures options. .. even things like changes in liquidity and volatility have an affect on prices. Other stocks... commodities.

All of the examples you just named as "changing multiple times per second" do so because of the existence of day trading and HFT. Really, it's just the markets valuation of these things that change this rapidly.

Nonsense. My example about currencies changing is one clear example of how 1 stock can be affected externally. But there are literally thousands of things in hundreds of markets that affect individual stocks. Just because you could control how quickly a price could be affected (thru regulations like the one you suggested) doesn't mean that the *value* is unaffected. If you *do* implement such regulations, you necessarily make the markets less efficient. Less efficient means globally worse. You can't prevent the value of something from changing. And the markets tend to work around regulations that harm efficiency - either deliberately or not.

It's easy to see some of these... e.g. the price of Kraft Foods is affected by the supply of milk and pork belly futures. Since those things directly affect the profitability of the company. Other things are harder to trace out... there may be many steps involved. Practically speaking, everything of value can affect the price of other things of value.

Supply of milk - a real example. Futures are again the market's valuation of something, but supply of milk is actually something real. So, how often is data released on the supply of milk? How much do the estimates change in a day? What about in a week, or a month? Sure, in any given day there could be a significant change in estimates, but how often do such large ch

Re: Wow,

[smaddox]

You completely missed the main points:
1. Bob shouldn't be penalized if Andy isn't.

Again, it's ultimately an acceptable drawback of the scheme. People can easily adapt by spreading their purchases over time.

2. Due to the increased risk, the cost to investing is higher. This *harms* the issuing company you are supposedly trying to help.

The increased risk raises the cost of investing relative to a market without day traders and HFTs, but that is not the market we currently have. Overall, there will be a net benefit.

You say there is a positive effect to a holding time - that it eliminates short term holding. But that's predicated on your *assumption* that eliminating short term trading is a positive effect.

It was not just an assumption, it was a supported statement. I'm not going to derive it for you, but I will try to explain it: day trading and HFT tend to accelerate short-term market changes because they base their investment decisions solely on said changes. If the price is falling, they sell, which accelerates the fall. If the price is rising, the buy, which accelerates the rise. Actual investors base their decisions on projections and long-term market changes. Said actual investors actually determine if a company is intrinsically worth investing in. Day traders and HFT do not.

You also say that some traders are a tax on "actual" investors. This isn't even clearly defined. What's the difference between "actual investors" and "short term traders"?

See above.

You already agreed that the 24 hour term you suggested for holding times is arbitrary.

This "tax" you talk about is one market participant earning money that another wouldn't.

No, it's day traders and HFTs earning money that actual investors would have. Where do you think the money that day traders and HFTs make comes from? It's not out of thin air.

Why do you care? I suggest it's only because it's not you.

Is it so hard to believe that I would rather an efficiently functioning system over a system in which it is easy to get rich quick by being a middle man? If I really wanted to be a day trader or HFT I could be very successful at it. But I don't.

The real effect here is that added risk increases the cost of trading, and therefore the cost of investing, and this slows growth. Slowed growth is bad for everyone.

Again, it only increases the cost of investing relative to a system without day traders or HFTs, which is not the system that we have. Overall, it would provide a net benefit. It would not slow economic growth.

Re: Wow,

[smaddox]

HFT actually takes volatility out of the markets... most such strategies make money from volatility.

Most HFT makes money by simply being a middle man. Day trading and the remainder of HFT increases volatility by producing positive feedback loops between the prices of various market valuations. They then profit from the increased volatility by getting between the actual investors.

You don't actually know how HFT makes money - that's part of the reason you assume it's bad.

Middle men can be useful. In this case market making is the closes HFT strategy to "middle man". Market making has been around a lot longer than HFT (perhaps going back to 1871 and the NYSE specialist). So here you're not even arguing against HFT.

Unfortunately (for your argument) I can easily demonstrate that market making is good and that HFT has made it better:

1. People don't have to pay the spread (unlike taxes). If buying you can join the bid, or if selling you can join the sell. So IF they trade with the market maker it's because they *choose* to and must see benefit.

2. People trade with market makers because they get the best execution. Fastest and within 1c of the best price (for liquid stocks). Joining the bid or ask doesn't guarantee you a match. This can be risky, since the price can move before you get execution - and it's not always in your favor. Indeed, if your buying it's because you think the price will rise - if you don't get execution quickly, and the price does rise, you've lost some of your earnings.

3. Market makers have the best prices. This is guaranteed because exchanges can only match at the best price. If they weren't at the best bid or ask they wouldn't get trades. No trades means no profit. Note this is best prices *across all exchanges*. See NBBO

4. Before HFT, market makers kept the spreads at 10c or 25c. HFT has (thru simple competition - the specialists had almost no competition) significantly improved this - by 10 to 25 times! Your broker charges more!

You're getting lost in details and forgetting basic laws of conservation. Where does all the money that HFTs make come from? It comes from investors. Yes, market makers are basically the same as HFTs, but operating at a slower rate. Because they operate at a slower rate, it's possible to avoid using them and trade directly with other investors, thereby eliminating the middle man. This is not feasible with HFT.

Stock prices are affected by many many things, and these things are indeed changing multiple times per second. Interest rates, currencies futures options. .. even things like changes in liquidity and volatility have an affect on prices. Other stocks... commodities.

All of the examples you just named as "changing multiple times per second" do so because of the existence of day trading and HFT. Really, it's just the markets valuation of these things that change this rapidly.

Nonsense. My example about currencies changing is one clear example of how 1 stock can be affected externally. But there are literally thousands of things in hundreds of markets that affect individual stocks. Just because you could control how quickly a price could be affected (thru regulations like the one you suggested) doesn't mean that the *value* is unaffected. If you *do* implement such regulations, you necessarily make the markets less efficient. Less efficient means globally worse. You can't prevent the value of something from changing. And the markets tend to work around regulations that harm efficiency - either deliberately or not.

I agree that there can be a very large number of actual influences on the actual value of a stock However, even if there are 10,000 influences with a mean time between significant changes of 1 week (10,000 minutes), a minimum holding time of 1 min would still be reasonable and not affect actual

Re: Wow,

[tolkienfan]

You're getting lost in details and forgetting basic laws of conservation. Where does all the money that HFTs make come from? It comes from investors. Yes, market makers are basically the same as HFTs, but operating at a slower rate. Because they operate at a slower rate, it's possible to avoid using them and trade directly with other investors, thereby eliminating the middle man. This is not feasible with HFT.

I'm not lost in details. I understand it very well. The only reason you don't want to examine the details is because they contradict your position.
The money HFT firms make does not all come solely, or even mostly, from investors. There are many kinds of traders. HFT makes money from active markets... someone who buys and holds (investors) will have contributed less than 1c per share in total to all HFT firms. Clearly that's not where HFT makes its money.
In the *details* that you're trying to avoid is the fact that investors have a choice. They can avoid the market maker - either by joining the bid or ask, or by only buying original issues - then they are really benefiting the issuing company! There is a reason people go to market makers - they have the best prices and provide the best execution. Unsurprisingly since they are the expertise.

Yes, market makers are basically the same as HFTs, but operating at a slower rate. Because they operate at a slower rate, it's possible to avoid using them and trade directly with other investors, thereby eliminating the middle man. This is not feasible with HFT.

This is just plain wrong. Anyone *can* avoid trading with HFT. Join the bid or ask. Actually, going thru a broker means you won't even need to hit an exchange: brokers often match internally.

I agree that there can be a very large number of actual influences on the actual value of a stock However, even if there are 10,000 influences with a mean time between significant changes of 1 week (10,000 minutes), a minimum holding time of 1 min would still be reasonable and not affect actual investors. And the preceding is likely an overly conservative estimate for most stocks.

Your are underestimating by orders of magnitude. What constitutes a *significant* change? If that change causes my holding to change, you better bet I'm going to adjust my positions. A significant change is any change in value. You've also shown just how arbitrary your 24 hours was. Now you're content with 1 min. You learned something and changed your opinion. I applaud that - most here on Slashdot don't.
Back to the example of milk... the price changes throughout each day: as demand goes up prices go down and vice versa. Also, we're talking milk futures. This means that things like weather affect the price, because it affects the price of future feed, which affects the dairy farmer and the supply. The price of antibiotics. All these things will be rolled into the price of Kraft Foods. Some things more than others, obviously, but this was a question of how frequently an underlying value can change. It's party the complexity of these relations that makes HFT useful and profitable. In a perfectly efficient market HFT couldn't exist. An inefficient market is bad overall, by definition (it can be good for a few).

The stock price absolutely affects the amount actually invested in a company because companies are continually acquiring more investment capital, and the market cap determines the price of such investments. You are technically right that the purpose of the stock market is to connect buyers and sellers, but I was referring more to the purpose of stock in the first place, without which there would be no stock market.

After IPO any reissue is at the current price. If the company wants to raise $1MM and the price is at $10, they'll issue 100,000 shares.
You're saying that HFT is bad because it doesn't help the company the shares are in. But that's true of *ALL* exchange trading, not

What a waste

[stewsters]

These people could be used to develop more efficient hardware for everyone to use, or fix medical conditions, rather than make rich traders even richer at the expense of another economic collapse. It seems wrong that our economy prioritizes high frequency trading so much.

Re:What a waste

[larry bagina]

You could be used to develop more efficient hardware for everyone to use, or fix medical conditions, rather than posting on slashdot.

Re:What a waste

[internerdj]

Apparently they make life possible because they move capital where it is needs to be, and deserve the medal of honor for what they graciously give the rest of us. http://finance.yahoo.com/blogs/daily-ticker/99-owe-debt-gratitude-1-harry-binswanger-153327379.html

Re:What a waste

[i kan reed]

It seems wrong, because it reflects a fundamental lack of concern for what securities represent. It is another step on the road of investment being more valuable than insight, labor, or creating meaningful value.

The underlying purpose of the stock market is the valuation of companies and what they do, but we see more and more evidence that the metadata outweighing the data. It's a subtle incrimination of corporate capitalism, that those involved really don't want to acknowledge.

Re:What a waste

[Alioth]

Maybe so or maybe not. A bit like the arguments "We shouldn't have both Gnome *and* KDE! Everyone should work on just one project so we get more done". The thing is maybe people working on HFT systems don't want to work on medical devices and wouldn't work on medical devices even if HFT didn't exist. I don't happen to work on HFT systems myself, but personally I wouldn't want to work with the stifling regulations there are for medical devices, I'd rather work on something that's rather more free in how you develop things.

Once you start saying things like this, you can also say "Well, no one should write video games. We shouldn't be wasting our time having people write Starcraft 2, they should all be working on medical devices".

Re:What a waste

[Anonymous Coward]

They have. See https://en.wikipedia.org/wiki/Alphamosaic for their previous jobs. Also, 3rd generation of their chips is in the Raspberry Pi, as the CPU.

Re:What a waste

[h4rr4r]

You think they do it for the love of HFT?

For that kind of money I would gladly deal with medical device regulators all day.

Re:What a waste

[Ralph Wiggam]

You can have a room full of insightful, creative people. But without investment, they won't be accomplishing much.

Re:What a waste

[internerdj]

There are some pretty interesting technical challenges with HFT and a competitive problem that isn't inherent to most technical problems which tend to often be man versus nature. It could have some appeal. That said, there isn't an amount of money and set of technical challenges interesting enough to make me want to work for that type of management structure and corporate environment.

Re:What a waste

[sjames]

OTOH, HST is not investment at all. Th market has become so messed up that it's easy to get investment for mail order pet food, but not for useful technology.

Re:What a waste

[the eric conspiracy]

Effective allocation of capital is absolutely critical to an efficient economy. It is a sine qua non of free societies.

It is why centrally planned economies don't work in competition with market economies. Look what happened to China when they released some the the reins vs. Mao's 5 year plans.

Why do you think the credit collapse had such a dire effect on the world economy 5 years ago?

Labor and creativity are important too, but they don't turn into meaningful economic activity without capital.

Investment is fundamentally important and always will be.

Re:What a waste

[the eric conspiracy]

That has nothing to do with the market and everything to do with the fact that the US is a consumer driven society.

Selling pet food brings an immediate, strong and much more certain return on capital than developing a new technology.

Re:What a waste

[gandhi_2]

Unlike the noble persuit of high-end graphics cards to build a totally bitchin' mining rig.

Re:What a waste

[Bengie]

I see it like racing. Lots of money goes into making fast cars go faster for something that has no real value. Yet many of the technologies that go into race cars still make their way into regular cars.

These kind of situations making crazy ideas worth trying and lots of money to back it. How long until home users get the benefit for FPGA assisted networking because it becomes a well-know subject and gets crazy cheap to implement because some rich people wanted to try to make even more money in trading?

Re:What a waste

[sjames]

Except it didn't. It was just another malinvestment.

Re:What a waste

[nurb432]

Without wealthy people you wont get your research for 'everyone else to use'.

Re:What a waste

[Urza9814]

High frequency trading isn't investment, it's gambling. It's hard to do any "meaningful economic activity" when the amount of money you have to do it with changes every couple milliseconds....

Investments are long-term. Investments are saying 'here's some money, you go build X and give me Y% of your profits'. That's an investment. And you don't need millisecond speed trades and specialized FPGA NICs if you're leaving your money there long enough for R&D, marketing, and sales. Investments last months or years, not minutes or milliseconds.

Re:What a waste

[Urza9814]

Yeah, interesting challenges like properly timing your insider trades to not appear to defy the laws of physics ;)

Re:What a waste

[curunir]

That room full of insightful, creative people gets their money from venture capitalists/angel investors. The only role the stock market has is making it easier for venture capitalists to exit from successful investments. Without the stock market, there could still be investment made in early stage companies, but investors would have be more discerning about what they invest in because they'd have to make their money back through company stock buy backs, dividends or acquisitions.

The way that investment happens would most certainly change but, in some ways, it would change for the better. There would be far fewer photo-sharing apps and other such nonsense that really doesn't need to exist. And I'm still not convinced that tying our retirement savings accounts (401(k), IRA, etc) to the stock market is such a good thing. The stock market continues to go up and up, in part, because of the millions that flow into it each month from workers saving for retirement. This has a Ponzi-ish feel to it...in the same way that Social Security will run into problems when the baby boomers retire, the market will also start to decline as withdrawals from retirement accounts outpace contributions. The whole thing feels like a Social Security that Wall St gets to skim large amounts of money off of.

The stock market is A mechanism for investment. It's not the ONLY mechanism. We should be able to separate stock market criticisms from the ad absurdum argument against all investment.

Re:What a waste

[GameboyRMH]

So thank goodness their moneyed overlords are willing to lend some of the cash made on the backs of such creative people, so that the creative insightful people can do more work and give the lion's share back to the moneyed overlords. It's a good thing we have a dynastic class of people controlling all the capital.

Re:What a waste

[SuricouRaven]

Those high-end graphics cards have some more noble uses too.

MRI scanners, for a start. It takes a huge amount of processing power to turn a tangle of radio signals into a rendered image of the patient. The early machines took hours to produce an image - with optimised hardware today, it's possible to generate them almost in real time mid-surgery.

Re:What a waste

[GameboyRMH]

The big difference is that racing doesn't skim money by acting as a middleman on other people's gas purchases. If HFT were taking place in a safe, closed environment as a sport it would be a vast improvement.

Re:What a waste

[spire3661]

Visual simulation is actually an important part of modern human development. I learned more about Orbital Mechanics playing Kerbal then i would have ever bothered to know otherwise. Now im not saying im qualified to build actual rockets for NASA, but at the same time, i understand the concepts of what they do much more.

Re:What a waste

[Ralph Wiggam]

So you can tell ahead of time which business ideas will be successful? You must have a really big house.

Re:What a waste

[sjames]

No, but I can read, so I know that such nonsense has already come along and flamed out (somewhat famously).

That would be why I used the past tense.

Re:What a waste

[internerdj]

Well I'm not sure how I would have modded my own post but funny isn't exactly the reaction that I had to the article.

Re:What a waste

[rockmuelle]

"It is why centrally planned economies don't work in competition with market economies. "

Market economies are centrally planned economies, with the rules that define the market being the basic plan for the economy. Without rules, markets would not function. The last 15 years (or 30, if you want to go back to 1980) have shown that market economies don't function any better for the general population than centrally planned economies. In both, wealth accumulates in the hands of the few that make the plan (rules).

-Chris

Re:What a waste

[defcon-11]

HFT algos aren't making bets on equity price movements. They're usually using sophisticated methods of finding and exploiting arbitrage opportunities.

Re:What a waste

[internerdj]

I hate to respond to your rather funny joke with serious stuff, but here goes: You need algorithms that have a success rate not just in accuracy but time. And that time isn't beating a physical or mechanical process, it is beating someone else's algorithm. That really stirs some primal motivational stuff for a lot of males.

Re:What a waste

[Ralph Wiggam]

Yeah. You're criticizing people for "malinvestments" with the benefit of hindsight. That's not exactly fair.

Re:What a waste

[sjames]

I also criticized that investment when it was announced, as did many people who weren't considered financial wizards. About the only people who didn't criticize that investment were the experts who must know what they're doing because they had money.

Re:What a waste

[Mr. Slippery]

Effective allocation of capital is absolutely critical to an efficient economy.

This has nothing to do with effective allocation of capital; the effective allocation of capital does not change on a millisecond-by-millisecond basis.

It is a sine qua non of free societies. It is why centrally planned economies don't work in competition with market economies.

During WWII, the U.S. economy was, in effect, centrally planned -- government spending hit a peak of over 50% of GDP. A centrally planned economy beat the Nazis and developed atomic weapons. And a centrally planned economy, the USSR, took a peasant nation and made it into a global superpower that won the space race. I'm not a fan of planned economies but it's not nearly as simple as you make it out to be

Labor and creativity are important too, but they don't turn into meaningful economic activity without capital.

Only because we have a system where labor (which includes creativity, intellectual labor is labor too (one of Marx's bigger blunders was neglecting that)) doesn't get access to capital without allowing capitalists their parasitic share. We can have capital without capitalists; we can't have labor without laborers.

Re:What a waste

[the eric conspiracy]

In the centrally planned economy there is far less wealth overall and the concentration depends on authoritarian control rather than competitive merit.

The last 15 (or 30) years have been remarkable for a lack of centrally planned economies. Basically they collapsed or their leaders became more open, and were replaced by market economies.

Re:What a waste

[Ralph Wiggam]

You must have made millions from shorting the stock, then.

Re:What a waste

[sjames]

You gotta have millions to make millions.

And it has to survive to IPO to short it.

Re:What a waste

[Hillgiant]

And that makes it better? Sounds like more rent seeking.

Re:What a waste

[Roachie]

Rent seeking is when regulatory mechanisms are put in place to extract value.

You are not obligated to buy or sell stock.

Re:What a waste

[Roachie]

So let me get this straight... centrally planned economies are great at... nuclear warfare??

Well if that isn't an endorsement I don't know what is.

Re:What a waste

[Ralph Wiggam]

Since you're so much smarter than all of those business idiots, you should be able to turn $10 into millions in no time.

And Pets.com did have an IPO. It went bankrupt less than a year later.

Re:What a waste

[sjames]

So where's your millions?

Re:What a waste

[memnock]

It's hard to believe you're right, especially since automated trading never fouls up or causes any problems.

Re:What a waste

[Ralph Wiggam]

I'm not the one claiming to be smarter than everyone on Wall Street.

Re:What a waste

[khallow]

What's the waste? It's not like there are physical laws keeping technology developments in finance from spreading to other fields that you happen to value. The thing people don't get is that stuff like HFT makes a society more diverse and funds a lot of R&D that would otherwise go wanting.

Re:What a waste

[dbIII]

Most of the people here are smarter than most of the people on Wall Street. There's no point in diefying a bunch of accountancy clerks, the occasional real accountant, the occasional real economist and a small number of bright mathematicians about as good as you'll find in any University.
Where luck and social contacts matter more than actual competence you get a lot of outcomes that are closer to superstition than reality.

Re:What a waste

[dbIII]

China still has a lot of central planning and an emphasis on saving. Look at their economy as distinct from the US one for the last five years. Some control of a capitalist system (which China most definitely is just like the US is) is a little better than foxes rampaging through the henhouse.

Re: What a waste

[tolkienfan]

Probably not.

Re: What a waste

[tolkienfan]

If I were buying and selling apples for a profit, would you call that skimming? Or be outraged by it?
What if I used computers to buy and sell apples far quicker and for less "per" profit on each (naturally to the benefit of my customers and suppliers)? What then?

Re:What a waste

[sjames]

I didn't crash the economy or somehow fail to notice that people like to pick through fruits and vegetables when they buy them. I'm not the one who can't imagine a way to use a durable $0.02 worth of wire rather than a flimsy $0.018 worth of wire without adding $10 to the retail price of the product.

And no, there is no deterministic way to turn $10 into $10M without assuming an incredible amount of luck.

Re: What a waste

[GameboyRMH]

I would be outraged by both if you were able to do it so fast that buyers and sellers couldn't communicate directly before you intervene, using a highly expensive premium service. How would this kind of activity benefit customers and suppliers? A sliver of a second isn't valuable to either.

Re: What a waste

[tolkienfan]

So that's a no.

If you don't want to pay the apple seller you don't have to. In exactly the same way, you don't have to pay the market maker - just join the bid or ask. You may not get filled immediately, and you may have to adjust your price a few times, but eventually you'll get filled.
The market maker doesn't do anything malicious, thy simply provide the best prices. If they didn't they wouldn't get trades... only the best prices on the book trade.

Re: What a waste

[tolkienfan]

I forgot to answer the question about speed.
Speed merely comes from competition between HFT firms. You go faster or you lose money. The competition is what drives the spreads narrower and therefore the cost of trading down.

Re:What a waste

[Alioth]

Wut? Lol! Seriously, LOL. In the biggest centrally planned economy of them all (the Soviet Union) in the 1980s, market economies served the general population *far* far better. The typical working class person in western Europe could go to a shop and buy all the basic needs without queuing up for hours. Soviet citizens on the other hand had to stand in line for hours on end for a loaf of bread - and maybe find it wasn't available by the time they got to the head of the queue. In the 1980s, a working class person in western Europe could go to a shop and buy a home computer for an affordable price. In the Soviet Union, they simply couldn't. The only way you could have a home computer is scrounge the parts and build it yourself, and very very few people could get their hands on the basic components. The centrally planned economies put the majority of the people in Eastern Europe and the USSR in a state of abject poverty compared to Western Europe. Not just in terms of "luxury goods" like cars and computers, but just basic foodstuffs.

Re:What a waste

[Intrepid imaginaut]

Investments are long-term. Investments are saying 'here's some money, you go build X and give me Y% of your profits'. That's an investment.

Ahah, nobody actually does that anymore. You have your pump and dump venture capitalists, and loans from the bank.

Re:What a waste

[Urza9814]

Yeah, that's the problem.

People do still do that though. Wall Street doesn't, but that's still how everyone else invests. From venture capitalists to 401(k)s

Re:What a waste

[Bengie]

Maybe not, but Ford, Honda, and everyone else, just passes the cost of racing down to the customer, so your car costs you more money.

Re:What a waste

[GameboyRMH]

Depends, some manufacturers don't have factory teams and just support privateer teams who pay for everything, I think all of Aston Martin's racing is done this way, and these days almost all of Toyota's racing is done this way as well.

Ferrari supports privateer teams but they mainly operate like a factory team, even if they got there in an unusual way - the cars cost more because of the racing, but it's because they sell cars (and all that merchandise) to pay for the racing, racing to promote the cars began as, and remains a secondary goal.

Next step : superluminic packet

[aepervius]

So that you can send your order before even the price quotation comes. Oh , wait, those guy already can do that and send packet back in time : http://news.slashdot.org/story/13/09/25/1955220/somebody-stole-7-milliseconds-from-the-federal-reserve /sarcasm

Re:Next step : superluminic packet

[necro81]

There has been speculation of people developing neutrino-based communication systems for high-speed trading. Because neutrinos pass through matter more-or-less unabsorbed and unimpeded, and travel at more-or-less the speed of light, you can do line-of-sight communication straight through the Earth. So, for instance, a trader in NY can send buy/sell orders to Japan by beaming neutrinos through the Earth and have them arrive faster than orders sent via optical fiber over the surface of the Earth (which is a longer path, and the speed of light in optical fiber is less than c in a vacuum), or via satellite.

Re:Next step : superluminic packet

[ebno-10db]

Neutrinos? Bah. A wormhole lets you shrink the distance between 2 points, so the speed of light is less of a problem.

Re:Next step : superluminic packet

[Anonymous Coward]

Neutrinos exist.

Re:Next step : superluminic packet

[Minwee]

So, for instance, a trader in NY can send buy/sell orders to Japan by beaming neutrinos through the Earth and have them arrive faster than orders sent via optical fiber over the surface of the Earth (which is a longer path, and the speed of light in optical fiber is less than c in a vacuum), or via satellite.

But even if they were using tachyons for communication, their orders would never arrive before the ones which come from a rack that is only five metres away from the exchange and connected directly to it with a straight optical cable. Even if the trader is sitting in NYC, they can still run their algos in Tokyo and get the jump on any other traders who don't.

Why resort to science fiction when there is already a better way?

Re:Next step : superluminic packet

[pla]

AC or not, this post count as 100% the correct response to the GP. Why did it get modded to -1?

Re:Next step : superluminic packet

[SuricouRaven]

Because there is more than one exchange. New York, London and Tokyo run the big ones. If you can get faster inter-exchange communication than anyone else, you can exploit the small differences in prices between them.

eg: Someone buys a ton of stock in Widgets, Inc in New York. This causes the price of that stock to suddenly rise, in a matter of miliseconds. Information reporting this is sent out as fast as the fiber will carry it towards London. Meanwhile, your sneaky neutrino communicator sends out the news too to your London end. Upon arrival, your neutrinos arrive a few miliseconds ahead - that gives your London trader enough time to buy as much Widgets, Inc stock as possible. Miliseconds later the news of that big purchase arrives for everyone else, and the stock prices surges in London too - at which point you sell, and pocket your profits.

Re:Next step : superluminic packet

[spire3661]

All of which should be completely illegal. There should be a minimum 'tick' to the trading so people cant pull 'fast ones' like this.

Re:Next step : superluminic packet

[ebno-10db]

Neutrinos exist.

Have you ever seen one? Besides, nobody has ever proven that wormholes don't exist, which fits great with the philosophy of the Masters of the Universe. Nobody has ever proven that all those derivatives and other exotic financial instruments will inevitably destroy the world economy, so just go with them.

Re: Next step : superluminic packet

[tolkienfan]

But the technology already exists to create and detect neutrinos...

Re: Next step : superluminic packet

[tolkienfan]

Why?

So much innovation for so little value

[hirschma]

Things like high frequency trading make me want to vom. Essentially, all they're doing is shuffling money around, taking advantage of an outdated system, and increasing risk for the entire world.

It'd be great to see this kind of innovation in something that actually is useful and valuable - not for creating an incremental improvement on a corrupt system.

Re:So much innovation for so little value

[KiloByte]

Essentially, all they're doing is shuffling money around.

More exactly: they're shuffling money from our accounts to theirs. If your bank has any securities involved with the stock exchange, it is your money that is getting nicked here. A zero-sum game requires that besides a winner there must be a loser.

Re:So much innovation for so little value

[HornWumpus]

The big loser is the trading clearinghouse/broker. Bid/ask spreads are about 1% of what they used to be.

The other big losers are speculators (as opposed to investors, look up the difference).

I see no problem with this except when the HFtraders are able to say: 'Our bad, back out all those losing trades for us'. That's just fucked.

Re:So much innovation for so little value

[i kan reed]

Except HFT is causing bigger spikes on stock prices, helping the speculators and hurting the investors who decide to get in or out at the wrong time.

Re:So much innovation for so little value

[AmiMoJo]

Just wait until someone figures out how to write an exploit targeting HF trading systems. Within milliseconds they could execute the biggest cyber attack in history and crash the economy of an entire country. They could even interlock it with trades from other countries just to make un-picking all the damage nearly impossible.

Of course it might just happen that way due to a genuine bug in one of the systems. Would be hard to tell which it was from a distance.

Re:So much innovation for so little value

[the eric conspiracy]

There is no evidence of that. All the really big stock price events occurred in the past. Like the 22% one day drop in 1987. In fact it's likely HFT reduces large spikes because the arbitrage occurs much more quickly.

And also just so you know, investors don't try to time markets. They hold for long periods of time so these fluctuations don't matter.

Re:So much innovation for so little value

[Ralph Wiggam]

Your basic knowledge of trading has no place here.

Keep in mind that you just replied to someone who thinks copyright laws are a "crime against humanity".

Re:So much innovation for so little value

[green is the enemy]

I think most non-finance people who read a little about high-frequency trading systems are repulsed by the concept. Can someone point out a useful economic function for them?

One the one hand they dramatically reduce the bid-ask spread for low-volume trades. But is that really all that economically beneficial?

On the other hand, they prey on large trades that mutual funds must place to rebalance their holdings. This probably hurts the average investor quite a lot.

Some claim that they increase liquidity and reduce volatility. Is that really so?

Re:So much innovation for so little value

[gmuslera]

You are playing their game too, you just get outraged because they play it more efficiently. They played enough with the rules to make millons just moving aluminum between 2 warehouses. Life is more than money, but for our current culture is everything.

Re:So much innovation for so little value

[Bengie]

If you an investor buying during a spike, you're doing it wrong.

Re:So much innovation for so little value

[lewkor]

I fail to see what possible connection this has to reality. I could dig up my old economics text book and trot out my old economics theory, but I don't have to. What possible change of the value of a good or service can take place in time scales of less than a milisecond? Computer trading systems are a fraud perpetrated by people that have a severe need of a reality check!!!

As the parent post alluded to all this serves is to make a dynamic system less stable. If the actions super rich (who else uses these devices) people didn't affect the likes of the rest of us I wouldn't care if they wanted to play these games! However, their nonsense like trading in derivatives have put the whole world monetary system in jeopardy!!!

Further, if like me you believe in the conspiracy theories of history (and if you don't then you are ignoring that conspiracies are ubiquitous in history), this may be the goal of the elites - to bring down the current ponzi scheme (the federal reserve system) so that they can reap the benefits of using the collapse to obtain real assets from the rest of us and put in place another fiat currency that lasts for another hundred years before they collapse that one too!!!

Re:So much innovation for so little value

[GameboyRMH]

This would be really hard to do. Similar things have happened by accident, at least within a single stock exchange, and the trades are simply rolled back.

Re:So much innovation for so little value

[radish]

A zero-sum game requires that besides a winner there must be a loser.

Who told you the stock market was a zero sum game? (Hint: It's not). Personally I don't give a crap how profitable my retail bank is as long as they keep paying the interest rate they promise - the fact that they take my capital and use it to invest is precisely why they're in business (no one ever made a profit leaving money in a locked box) and I think it's great that they can continue to pay their employees.

HFT had nothing to do with the recent collapse, I'm not really sure why everyone's so up in arms about it all of a sudden. Eventually the margins will dry up and then people will move onto something else.

Re:So much innovation for so little value

[Crimey McBiggles]

The idea that "the market sorts itself out" is easily debunked when looking at the differences between theory and practice of economics. Any econ major will tell you that the prime assumptions are that all actors in the system will make rational decisions, yet people are not purely rational beings; even tracking the market reveals more about how people feel than it will about the actual cost/value of commodities.

Re:So much innovation for so little value

[ggraham412]

Is it a benefit to you that you can pull into a gas station and be assured that you're getting close to the best price for gas in your geographical area?

Is it a benefit to you that you can buy bacon, milk and bread at the store, and be assured that any price differences actually do reflect differences in quality and/or taste, and are not just artifacts of where you bought those items?

When you buy a stock like APPL, is it a benefit to you that you're getting the best available price and you don't have to worry about checking 10 different trading venues before you make a purchase?

All of the above are commodities (or financial instruments in the case of APPL) that are subject to arbitrage and HFT. Before you vomit, consider why it is that prices have stability outside of day to day macro-economic effects.

Re:So much innovation for so little value

[ggraham412]

And slowing down HFT would fix this ... how?

Re:So much innovation for so little value

[slashdotjunker]

Actually, trading is a negative-sum game because the broker collects a commission.

Re:So much innovation for so little value

[ggraham412]

There is an inherent cost to conducting transactions in a market place. You can think of it as the cost of buying X and then turning around and selling X: you are left in your initial state minus an amount called the bid/ask spread. In general, reducing the bid/ask spread reduces the inherent cost to you of buying and selling things.

I'm not sure I follow why HFT is bad for mutual funds. There is a small premium that is being effectively paid to arbitrageurs, but the gain is offset by the fact that the mutual fund doesn't have to employ a team of analysts to scour N different venues for a best price and doesn't have to worry about getting out of a trade soon after getting into it (which also manifests as a cost: the fund has to factor in that as a risk).

Arbitrage increases liquidity - essentially you are supporting prices in one market with similar products from other markets. Maybe APPL against an ETF that contains APPL and a basket of the other stocks in that ETF, or a June futures contract against a July contract and a June-July spread. HFT is the tool of arbitrage, mainly because the matching at the exchanges is FIFO. I've not seen any convincing evidence that it increases volatility. There are some well documented cases of mini-crashes that happen when HFT operations are turned off suddenly and in concert, in response to human error or some bug, leading to momentary liquidity crises. People obsess about that and no one seems to remark on how quickly markets recover after the HFTs are turned back on.

Re:So much innovation for so little value

[KiloByte]

Who told you the stock market was a zero sum game? (Hint: It's not).

There is no input other than the Ponzi effect. All possible overall profits come from dividends, which are not related to stock exchange. Ie, you can legitimately benefit from owning a portion of some enterprise, but not from trading it back and forth. And since your trades are less informed than those of the privileged few, it's you who is losing on the average.

HFT is effectively skimming a bit from every trade. And every cent skimmed is a cent stolen from legitimate investors.

Re:So much innovation for so little value

[dunkelfalke]

So basically what you want to say is that before HFT was possible, there was no price stability for commodities?

Dude, whatever you are smoking, cut it.

Re:So much innovation for so little value

[the eric conspiracy]

Nah. The weak efficient market hypothesis works pretty well when predicting market returns.

Once you understand Behavioral Economics it's still a pretty rational market at the end of the day.

Re:So much innovation for so little value

[ggraham412]

Well yes you're right; more precisely, it is arbitrage that contributes to the price stability. But most arbitrage takes place today with HFT. Before HFT was possible, sure, there were other means to accomplish arbitrage. However, that doesn't change the fact that today, you have HFT to thank for the benefits of arbitrage.

One of the side benefits of the electronic trading is the traders are anonymous to each other (but not the regulators) and an audit trail gets automatically generated. Some people might call those the main benefits. Why is speed necessary? Because the matching algorithms are mostly FIFO. If you can think of a more fair way to match up buyers and sellers you're welcome to try. But FIFO is the least biased, and therefore being first is a premium.

Re:So much innovation for so little value

[dunkelfalke]

Arbitrage is just another form of speculation, and while it may help price stability, it may just as well help to price volatility and needlessly high prices. Which, when we talk about food, actively kills people.

And before you dismiss that as not fitting into your worldview, consider that what I have written comes from the internal papers of Deutsche Bank Research [1] [2] which was big news here in Germany a while ago.

Re:So much innovation for so little value

[JesseMcDonald]

Who told you the stock market was a zero sum game? (Hint: It's not).

There is no input other than the Ponzi effect.

If you're measuring the market in terms of wealth or value rather than dollars, it clearly isn't zero-sum because resources are worth more when they're allocated properly. Even if you choose to measure the market in terms of dollars, however, it's hardly a closed system. Dollars enter and leave the market all the time in response to changing prices and external events. A given trade may be zero-sum, or it may increase or decrease the size of the market, making it positive- or negative-sum. Looking further, changes in the size of the market mean changes in the amount of investment, and thus capital goods, and thus overall productivity, another non-zero-sum effect. Low liquidity and high spreads, in particular, scare off even long-term investors; even if you plan to hold an investment for years, you may need to sell it on short notice, and would prefer a reasonably stable market price.

Re:So much innovation for so little value

[HornWumpus]

Which is fucked if you spotted the bug and were exploiting it. Why do they get to undo their mistakes?

GP is on crack, crash a national economy by finding a bug in one traders code?

Markets are bigger then HFtraders. If the HF trader(s) are doing stupid things the rest of the market will just take their money.

Re:So much innovation for so little value

[GameboyRMH]

What if the HF traders do all their stupid things before the rest of the market can even react?

Re:So much innovation for so little value

[Roachie]

Sounds like a mulligan for rich people.

Re:So much innovation for so little value

[HornWumpus]

By definition they would be transacting between themselves. Then when the market does react it takes their money. They have to be right to make money. If they were to double the price of a particular stock in a second, the market would see how many shares they could actually afford to buy.

Remember the market is bigger than any one trader. Even GS.

Re:So much innovation for so little value

[khallow]

The idea that "the market sorts itself out" is easily debunked when looking at the differences between theory and practice of economics.

Have you actually done this activity in question and have you compared it to any other means of attempting to do the same sort of thing? I have and my take is that markets work pretty well for what they do - enabling the trade of various goods and services and establishing a commonly accepted valuation for those goods and services. And they are better at that process than any method that doesn't involve markets.

even tracking the market reveals more about how people feel than it will about the actual cost/value of commodities.

That's an interesting feeling you have there. It tells me however, that you've probably never attempted to determine the value of goods on a liquid market. After all, if commodities are priced on peoples' feelings rather than actual cost/value, then someone can make a killing by being the rare rational investor/speculator.

Re:So much innovation for so little value

[khallow]

One the one hand they dramatically reduce the bid-ask spread for low-volume trades. But is that really all that economically beneficial?

So how economically beneficial do they really need to be here?

On the other hand, they prey on large trades that mutual funds must place to rebalance their holdings.

In other words, they prey on large traders with poor trading practices. That's economic value right there.

This probably hurts the average investor quite a lot.

So what? The average investor shouldn't be doing stuff that HFT can exploit.

Some claim that they increase liquidity and reduce volatility.

Well, they can serve as high frequency market makers and that's one of the benefits of having those guys. You've pretty much nailed the primary advantages of HFT.

There are several other things to consider. They do a lot of interesting research. And they test every computer trader involved and the market system itself.

Re:So much innovation for so little value

[the eric conspiracy]

Market circuit breakers have been around since 1989. They are much older than HFT.

As far as markets sorting themselves out, if they didn't you could make a bundle on just trading simple public information.

Hint: You can't. By the time you become aware of this information, it's been arbitraged away.

The fact is that most investing is done by active fund managers who believe markets are not efficient. How do they do? Exactly the same as simple mechanical index funds but at higher cost.

This is why the mad scramble in HFT operations to cheat and get information first.

Re:So much innovation for so little value

[Cederic]

You do realise that a significant percentage of the HFT systems out there are explicitly trying to understand and exploit the strategies and implementations of the rest of them?

This is already happening.

Re:So much innovation for so little value

[Cederic]

So basically you support the markets being a closed shop in which people without vast resources are unable to actively participate?

I think that's bullshit, it damages liquidity, it removes peoples ability to react to changing market conditions and it greatly impacts people with institutional investments unless those institutes are engaging in HFT themselves. Which they likely aren't.

I prefer passive investment myself because I'm lazy and risk adverse, but I do recognise the benefits of active trading. Getting fucked through information arbitrage isn't a good thing.

Re:So much innovation for so little value

[Cederic]

Yes, in that their fail-safe is a market rollback.

I'd fucking ban those. If it took out the companies doing HFT because they overcommit in 14ms then on the whole this would be a bloody fantastic thing.

Re:So much innovation for so little value

[dbIII]

There was plenty of liquidity before HFT started. I do not think that excuse for the HFT man in the middle attack is valid.

Re:So much innovation for so little value

[imikem]

If you're an investor not selling during a spike, you're holding it wrong.

Re: So much innovation for so little value

[tolkienfan]

You have no idea what you're talking about.
1 because of HFT market makers your buys and sells are always within 1c of current value (for liquid stocks)
2 because of HFT arbitraguers price differences at different venues are negligible
3 when you trade you don't need to pay the market maker anything. No one forces you to trade with a market maker.

Re: So much innovation for so little value

[tolkienfan]

Do you know how often the circuit breakers kick in?

Re:So much innovation for so little value

[Hognoxious]

iSee what you did there.

Fuck off and die

[Anonymous Coward]

Fucking parasites (and their toolmakers).

Your Start Trek reference

[Anonymous Coward]

Makes no sense.

Re:Your Start Trek reference

[BravoZuluM]

Sure it does. Just like the torpedo, this board will single-handedly cause a market explosion by with all of the other trading platforms can target. It will be glorious.

Re:Your Start Trek reference

[ericloewe]

Have you considered getting a job writing analogies?

Older idea than you might think

[Anonymous Coward]

I have a friend who works in the defense industry but interviewed with HFT firms around 3 years ago. My friend also had this idea, and discussed it with me since I am close to the industry.

If an industry outsider like my friend had this idea within a week or two of merely interviewing for jobs, it is a good bet many others had already conceived it and even gotten it working before that.

Re:Older idea than you might think

[Anonymous Coward]

I have a friend who works in the defense industry but interviewed with HFT firms around 3 years ago. My friend also had this idea, and discussed it with me since I am close to the industry.

If an industry outsider like my friend had this idea within a week or two of merely interviewing for jobs, it is a good bet many others had already conceived it and even gotten it working before that.

Yes, and when I was 8 I had the idea for a nuclear-powered photon drive for a rocket ship. Unfortunately translating the concept from my crayon drawing of a Saturn 5 with light-bulbes instead of exhaust nozzles to a working prototype proved to be impractical.

Ideas are cheap. Implementations are what matters. Particularly for something like this where hardware and software both need to be developed and speed and reliability are paramount. Having a basic idea of the algorithm is a far cry from a devise that works reliably enough and faster enough to be an improvement over established competing systems.

Re:Older idea than you might think

[Fnkmaster]

Putting aside, for the moment, all the Slashdot griping about whether this is or is not a productive use of human time and energy (I agree it's probably not in a macro sense, but hey, that's the world we live in), this is indeed an old idea.

I worked as a consultant on a hardware-based HFT system back in 2007 for a Silicon Valley company called Xambala. They were using reconfigurable logic-style chips of their own design specialized for text processing applications, rather than more general purpose FPGAs, though we discussing chaining their chips with FPGAs for more computationally intensive algorithms.

The edge you are going to get from doing processing in silico is quite limited. You can conceivably cut a few tens of microseconds, maybe even 100 microseconds, out of a computation - you still have to have all the other pieces of the puzzle just right. If you are doing straight news/information driven trades in situ at an exchange and can get the same timing of feed data to respond to, then you'll have a good edge (i.e. "Buy if X>0.2, Sell if X0.1, do nothing otherwise).

If you are trying to do intermarket arb (futures/ETF arb, for example) your edge is smaller, since differences in network route, networking hardware, other infrastructure are generally larger in magnitude than what you gain from cutting a few tens of microseconds out of the picture in hardware - but this edge would probably serve existing players well who already have top tier infrastructure.

For the more sophisticated, "game"-driven trading algorithms out there in equity markets, how much value doing stuff in hardware gives you is variable. There's a lot of decision logic involved in spiking orders around, changing behavior states based on other participants, and so on. A better set of algorithms running on top tier infrastructure in software will probably do better than inferior algorithms running in hardware without top tier infrastructure.

Other than Xambala, I am sure there are other players doing similar things. I've also used CUDA on NVIDIA GPUs for calculating option market prices really fast. These are just tools and other people definitely are using these tools in the right scenarios. What really matters in making money is combining the right tools with good implementation, excellent infrastructure, and testing and adaptiveness to market conditions.

Re:Older idea than you might think

[LordNacho]

As an insider, can you tell us what decision process is? I'm in finance, and I can't see what they are doing in such a short space of time. Is it literally just looking at the imbalance and moving first? Or also a few trick-like things such as using special order types?

Re:Older idea than you might think

[Shatrat]

This is essentially how hardware NTP servers work I believe, with the hardware directly supplying the timestamp information as the packet is assembled.

Re: Huh?

[Anonymous Coward]

No, this is arbitrage. Taking advantage of price differences within or between markets.

Solution for a non-problem

[depressedrobot]

Ok I can see it having implications in high speed control applications now that I think of it. Something like CERN, NIF or any space agency could use it. But we wont have any money to build anything because its more profitable to build shit like this to skim parts of pennies out of the jar than to actually build cool shit that needs FPGA controlled switches.

Re:Solution for a non-problem

[ericloewe]

When you're dealing with space, shaving a millisecond off your processing time doesn't gain you much if you have to wait seconds (or much longer) for signals to reach their destination.

Re:Solution for a non-problem

[depressedrobot]

Was thinking of its use in combination with data analysis of distributed data processing of fluid dynamics.

Re:Solution for a non-problem

[ericloewe]

I'm not understanding how you'd benefit from processing that's done as soon as possible after the packet arrives.

To me, it sounds like you can just store the data and analyse it on a proper system instead of a very limited FPGA that's oriented towards latency-critical applications.

Out, Out, Damned Glitch

[b4upoo]

Just think of the expenses that could be involved if one of these programs screws up. Instead of sell! sell! sell! One could buy! buy! buy! the wrong stock in very large quantities. Instead of a billion dollars in buggy whips one might end up with a billion dollars in donkey whips. What a bummer.

Re:Out, Out, Damned Glitch

[the eric conspiracy]

This sort of stuff happens all the time.

http://dealbook.nytimes.com/2012/08/02/knight-capital-says-trading-mishap-cost-it-440-million/

http://www.cnbc.com/id/100980489

Re:Out, Out, Damned Glitch

[Minwee]

Just think of the expenses that could be involved if one of these programs screws up.

This has already happened. The screw-ups in question lost over $400,000,000 in half an hour.

Re:Out, Out, Damned Glitch

[gmuslera]

Is a no risk operation. If they screw up big, they will be bailed out again. The more important asset in their pocket is still the government, all versions of it.

HFT can easily be stopped

[Anonymous Coward]

Set a minimum x hours before a stock can be resold.

Re:HFT can easily be stopped

[boristdog]

Set a minimum x hours before a stock can be resold.

You don't even need x hours, you could just make a rule that stocks need to be held for a few seconds, or put a random 1 to 5 second delay on each trade.

Re:HFT can easily be stopped

[Minwee]

Okay, I am holding 500 shares of ABCD. At 10:01:32.0512 I buy 500 more shares at 10.12. At 10.01:32.7691 I sell the original 500 shares at 10.13, but am still holding on to the new 500 I just bought. Have I just broken your simple rule?

I have? Then how about this: Firm A buys, and then firm B sells the same thing less than a second later. X hours after the original buy, Firm A sells the same stocks to firm B. While both firms are owned and run by different people, they share the same address and make a large number of trades with one another. Are either of these firms breaking your rule which easily stops HFT?

Concepts are easy. Making rules is hard, especially for a game which is played by the biggest rules-lawyering munchkins on the planet.

Re:HFT can easily be stopped

[Roachie]

Then the big firms will continually buy small lots to always have some 'negotiation power' on hand at any given time to do with what they wish.

Meanwhile you'll sit for 'a minimum x hours' or 'a few seconds' with your thumb up your butt, counting the seconds until you can sell and cut your losses.

Re: Huh?

[gl4ss]

technically it's more like bribing the telegram machine operator to perform trades based on rules you give him..

why bribing? well you have to know the right people to pay money to even begin trading in this fashion. now I wouldn't have a problem with it if it was accessible to everyone, for example if anyone could buy machine time from vm's that were all given the information at the same time(artificially arranged, wouldn't work otherwise!) at the stock exchange.

Re:how long before this house of cards collapses?

[ebno-10db]

Ya know, as a Morlock, I'm starting to look at them less as gated communities and more as veal pens.

Veal? That's barbaric. Wait until they're older - they're still pretty tender at 18.

Don't understand

[XanC]

What is with the vitriol here? Why should buyers and sellers not be able to come together to make a transaction at any time that they like?

Re:Don't understand

[SirGarlon]

The point of high-frequency trading is for the buyer to pull a fast one: to offer a price that an informed seller would not accept, before the seller can find out what the fair price should be.

Re:Don't understand

[pla]

What is with the vitriol here? Why should buyers and sellers not be able to come together to make a transaction at any time that they like?

They should!

But computers can't "like" ice cream, either.

Re:Don't understand

[sjames]

Because this is rent seeking and has a lot more to do with jumping in between legitimate buyers and sellers to extract money than it does with investment.

Also because the people doing it have already managed to crash the world economy once and through political maneuvering got a handsome payout for doing it rather than the jail time they deserved. Because in spite of the big handouts from the taxpayers they continue to shit all over everyone.

They should be roasted on a spit until they stop screaming.

Re:Don't understand

[GameboyRMH]

Exactly. Say there's a classified site that you can only load once per minute due to bandwidth restrictions (being a human). I post "Bicycle for sale $500" and another guy posts "wanted: bicycle, $600 or less."

But there are some guys who can reload the page faster because they've bought a very expensive premium service from the classified site. Not a very fair site is it?

One of them sees the two ads, buys my bicycle, and posts "Bicycle for sale $599" before any non-premium members can see what's going on.

Who did that help except for the guy with the premium service? I didn't make more. The guy who wanted a bike just got screwed out of $99.

Re:Don't understand

[radish]

You do know TARP made a profit, right?

Treasury has already recovered an amount that is greater than what was invested in banks under TARP. Taxpayers began to see a positive return on their bank investments in March 2011. Every additional dollar that is recovered from TARP's bank investments represents an additional return for the taxpayers. ââ

I'm not saying it was a good situation, but all this talk of massive bailouts is complete nonsense. The plan did what was intended and made some money for the taxpayer at the same time (the investment in AIG alone made over $20B). If you want to be mad at someone - look at the car companies - they still owe $$$$.

Re:Don't understand

[radarskiy]

Free markets depend on information symmetry to be efficient. If the trades are faster than any other connection, then the cannot possibly be based on information about the market.

So the real question is: why do you hate free markets?.

Re:Don't understand

[onkelonkel]

1. the guy selling the bike got his money 59 seconds sooner, is this not a benefit? 2. Anybody who wants can buy the premium service. That means there may be multiple people competing for the $100 spread between the buyer and seller. In your scenario, they have all posted adds selling a bike for $599, but only one can buy the bike for $500, and the rest have to buy the next highest priced bike if someone accepts their ad. Some of them may not make any money or may lose money on the transaction. Therefore, in order to prevent this, the next time they will offer a bit more than $500 to the seller, to make it more likely that their buy offer is accepted.The trade still happens more quickly, the seller gets more money, and the HFT guy gets a smaller profit. Over many trades, the competition reduces the HFT traders profit, while still speeding up the rate that bikes are bought and sold.

Re:Don't understand

[sjames]

And in gratitude for getting their loan and a chance to pay it off even when they were not exactly looking like great credit risks, they went on a foreclosure frenzy to the point that they were foreclosing on homes that didn't even have an outstanding loan, much less one they held.

Really nice show of gratitude.

Re:Don't understand

[CodeBuster]

You asked for $500. Presumably you were happy selling at that price. If you wanted more then why didn't you just ask for more in the first place? If you buy a Powerball ticket and don't win are you mad at the persons(s) who did? A curious trait that I've observed in young people, especially the so-called millenials or Gen-Y, is that they spend inordinate amounts of time agonizing over the minutia of every decision, whether important or not, because they're terrified of making suboptimal choices and regretting it later. Life is full of imperfect choices and suboptimal outcomes. Most of us learn to live with that, but a few never do and spend their lives in anger and frustration over what's fair and what's not or what might have been.

Re:Don't understand

[L4t3r4lu5]

Your argument is specious. You sold your bike for the price you asked, the buyer got a bike for a price that he was prepared to pay. Nobody lost anything. The HFT paid for the premium access to the site, so the site operator gained. He was almost certainly not offered a guarantee of profitability on that investment. The risk, however, paid off when the HFT found a seller, a buyer, put the two together, and made commission. You, as a seller, certainly did gain as you were introduced to a buyer promptly.

I understand that HFT and stock trading in general is more complicated than this, but your analogy isn't the right way to show the faults.

Re:Don't understand

[GameboyRMH]

Who said I wanted more? That would be OK, but on the other hand the guy who wanted a bike didn't necessarily want to pay as much. I just don't see why some fast-moving little bastard with special access should get to siphon all the value out of the transaction between us.

A curious trait that I've observed in young people, especially the so-called millenials or Gen-Y, is that they spend inordinate amounts of time agonizing over the minutia of every decision, whether important or not, because they're terrified of making suboptimal choices and regretting it later.

It's because the consequences are far greater for us than past generations. We need the most optimal outcome just to get by.

Re:Don't understand

[CodeBuster]

That would be OK, but on the other hand the guy who wanted a bike didn't necessarily want to pay as much.

The buyer could have walked away if he didn't like the price.

I just don't see why some fast-moving little bastard with special access should get to siphon all the value out of the transaction between us.

That's why you never put in orders at market. You always buy and sell with limit orders. If the order can be fulfilled at a price that you are willing to pay or accept then it happens. If not, the order remains active until the target price is reached and any other conditions, such as all or nothing (AON) or fill or kill (FOK), are satisfied. As a human investor, and not a computer, you prefer to have the price you want rather than certainty of execution at a certain time. You cannot win on timing, but you don't also have to lose on price. Will it be the end of the world if you cannot buy or sell at any given second? For most small investors the answer is almost certainly not which means that you can afford to be patient. That's your advantage. Let the high frequency traders pass their shares around like hot potatoes thousands of times per second, it's meaningless on time scales of months and years because the long term value of the investment will always trend back towards the long term value of the underlying business or asset.

It's because the consequences are far greater for us than past generations. We need the most optimal outcome just to get by.

Whether or not your order executed at $3.50 or $3.52 doesn't make a damn bit of difference over the long run. Learn the lessons of Warren Buffet and you will realize that the intense focus on high frequency trading is a tempest in a teapot for the long term investor.

This is nothing!

[Medievalist]

In Chicago, traders are working faster than light.

You have to be a rich bankster to achieve faster than light trading, though. If anybody else does it it's cheating.

Re:Jerk warefare

[ebno-10db]

These jerks doing HFT is giving people in the financial sector a bad name.

I didn't know they could get a worse name.

No matter what Wall St apologists say, this is skimming.

Probably so, but it's nothing compared to the outright criminal activities (especially control fraud) that were practiced pre-crash, and probably post-crash as well. The DoJ, SEC, OCC, etc., etc., etc. have bent over backwards to not investigate, let alone prosecute these crimes. For good measure, toss in the corrupt but unfortunately not illegal practices of the Fed engineering yield curves to benefit the banks, buying commercial trash securities (the law says the Fed is only allowed to buy high quality securities) or letting investment firms like Goldman-Sachs have access to Fed loan facilities (they're supposed to be limited to depository institutions).

They cut off the end of the summary

[slashmydots]

Actual full summary ending: "They call these techniques 'inline parsing' and 'pre-emption' and 'greedy unfair asshole companies making billions for their owners through cheap, cheating tactics like this to undercut smaller startups and push them out of the market so their fat owners can buy another personal jet instead of handing off the profits to their investors/customers'"

Most tenuous link ever?

[wonkey_monkey]

In The Undiscovered Country they modified a torpedo to home in on gas emissions from a Klingon Bird of Prey. This is a story about building trading algorithms into an ethernet switch.

Apart from "needing to do something quickly," I really, really can't see the connection.

Re:Most tenuous link ever?

[XanC]

The thing's gotta have a tailpipe.

And this is a good thing because..... ?

[gsslay]

Making lots of money by pushing network packets around faster, to no real net benefit to anyone. Other than the ones pushing the packets.

Pipelining

[K. S. Kyosuke]

They call these techniques 'inline parsing' and 'pre-emption.'"

And everyone else has been calling this "pipelining" for decades.

Re:Pipelining

[michaelmalak]

And everyone else has been calling this "pipelining" for decades.

I'm not aware of any pipelining system that performs partial parsing. In CPU pipelining, "instruction decode" is AFAIK a single, atomic step.

Re:Pipelining

[K. S. Kyosuke]

I'm not aware of any pipelining system that performs partial parsing.

As far as I'm aware, TeX has been processing its input in this way since time immemorial. Pipelining is a generic concept, it's not constrained to CPU instruction processing.

Re:Pipelining

[michaelmalak]

As far as I'm aware, TeX has been processing its input in this way since time immemorial.

Do you have a link that describes that? I'm not finding anything Googling for combinations of Tex, pipeline, and parsing.

Re:Pipelining

[K. S. Kyosuke]

Do you have a link that describes that?

Of coruse, here you are

I'm not finding anything Googling for combinations of Tex, pipeline, and parsing.

That's because Knuth uses some idiosyncratic terminology. Remember, it was the 1970's anyway. A lot of things was called something else back then and would be unrecognizable by name to your average young whippersnapper. (Going back to CPUs and the issues of ordering and dependencies in HW, what we call "our-of-order execution" was called "dynamic instruction scheduling" in the 1960's. Who'd divine it from the name nowadays?)

Re: Huh?

[Minwee]

now I wouldn't have a problem with it if it was accessible to everyone, for example if anyone could buy machine time from vm's that were all given the information at the same time(artificially arranged, wouldn't work otherwise!) at the stock exchange.

Sure you would. You might not think so, but suppose that the exchange set up a perfectly equitable system in which identically configured were made available to every firm and provided with identical market feeds all perfectly synchronized so that no single trading VM has any advantage over any other.

I would give that system about three hours of run time before you discover that:

• - Your competitor has just acquired seventeen different vms through deals with other firms and is using them to dominate the market, pushing out firms using only one or two vms,
• - Your market feed is being saturated with bogus bids and offers which reduce your ability to see real market data, but somehow one of your competitors is able to filter it all out and trade ahead of you,
• - Other VMs on the same host as yours suddenly start running at 100% of their CPU and I/O capacity, causing slowdowns for you, and
• - A mysterious and completely untraceable hardware fault causes all vms except for the first seven to experience periods of unexplained latency at key times during the day.

Just look at the tricks that players in the game are already using, and ask yourself how changing the rules is going to stop them.

Who Stole 7 Milliseconds From the Federal Reserve?

[transporter_ii]

I think we just found our culprit.

"free" market solution

[Thud457]

tax every transaction.
Also tax rolled back oops, my bot "ran amok" transactions. Also track these and send the history to our regulatory watchdogs who, supposedly, will take an interest in the chicanery of anyone abusing this "feature" of the markets. Or just don't allow them to be undone in the first place. caveat emptor, bitches.

Re:"free" market solution

[ShanghaiBill]

tax every transaction.

Because the effect of that would be to push even more transactions into unregulated "dark pools". Why do you believe that HFT is harmful? Do you have any evidence, other than fear of something you don't understand? HFT has drastically lowered transaction costs, benefiting everyone except the traditional middlemen. HFT was blamed for some of the "flash crashes", but more thorough investigation has shown that HFT actually decreased volatility. One of the recommendations of the SEC's 2010 investigation was to find a way to keep HFTers active during periods of volatility. Perhaps even requiring them to actively trade in order to keep markets liquid.

Re:"free" market solution

[Raul654]

"Because the effect of that would be to push even more transactions into unregulated "dark pools". Why do you believe that HFT is harmful? Do you have any evidence, other than fear of something you don't understand?"

Yes - (1) HFT has the potential to cause extreme volatility swings. (2) HFT essentially introduces a tax on every other buyer and seller in the market (because it actually widens the difference between the post and the offer).

On point #2, I'll just leave this here: http://qz.com/95088/high-frequency-trading-is-bad-for-normal-investors-researchers-say/

Re:"free" market solution

[ShanghaiBill]

Yes - (1) HFT has the potential to cause extreme volatility swings.

All the actual evidence says the opposite.

(2) HFT essentially introduces a tax on every other buyer and seller in the market (because it actually widens the difference between the post and the offer).

Nonsense. HFT reduces the spread, by reducing the risk inherent in holding the stock. If they didn't reduce the spread nobody would trade with them.

On point #2, I'll just leave this here: http://qz.com/95088/high-frequency-trading-is-bad-for-normal-investors-researchers-say/

This is not research on normal "market making" HFT. It is only research on arbitrage, where it shows that slow traders lose to fast traders, which is already pretty obvious. But for a normal person buying or selling a stock, a market making HFTer is going to offer a better price. If fact, nearly all exchange transactions are executed by HFT, because they offer a better deal to both the buyer and the seller.

Re:"free" market solution

[mbkennel]

"nearly all exchange transactions are executed by HFT, because they offer a better deal to both the buyer and the seller."

Uh, then how are they making money? They aren't giving these good deals for charity.

Re:"free" market solution

[ShanghaiBill]

Uh, then how are they making money?

They make money because their transactions costs are lower. Their transaction costs are lower because their risk is lower. Their risk is lower because they are holding the stock for a very short period of time. If the "hold time" is increased through legislation, the risk goes up, and the transaction costs go up.

Re:"free" market solution

[error_logic]

You're going to have to do better than that to convince many people. It sounds like you're hand-waving in order to support the notion of middle men benefiting both sides by inserting themselves. I'd be interested if you could prove your points in a way that sounded less like you're presenting one side of the real story.

What is the fundamental source of a transaction cost?
You say it's related to the risk; is that just for short-term risk of people involved in holding stock for the purpose of connecting [slower] buyers and sellers?
The risk may be lower in the sense of maximum possible damages, but what about gains? Don't HFTs try to maximize profits, not just risk mitigation?

Doesn't that mean they're taking profit that would go to regular investors, ignoring the time required for more meaningful investment to pay off?

Finally, you speak of risk for the individual entity investing. Personal risk. Yes, if you can shift things around faster than anyone else, you can save yourself first. What about the market? Can you really say it reduces the risk of fluctuations as all the self-invested HFTs bail out, cratering the market value? Especially considering the aggregate risk introduced by such short term thinking as caused the housing crisis and many other bubbles?

Re:"free" market solution

[dbIII]

Why do you believe that HFT is harmful?

Because it is the classic Man In the Middle attack where the high frequency trader subverts the communications channel between the buyer and seller, jacks up the price and takes the difference. It adds nothing and is a drain on the economy.
If you do such a thing with just about any other form of information it is considered highly illegal.

Re:"free" market solution

[ShanghaiBill]

Because it is the classic Man In the Middle attack

Nonsense. Stock exchanges always require a middleman. Do you really think that individual investors can log onto the NYSE computers and search for another individual to buy from? It has never worked that way. In the old days, the middlemen were guys in the pit passing paper back and forth. Today they are HFTs. The difference is that the HFTs are far more efficient, resulting in far lower transaction costs for everyone. Anyone that wants to go back to the "good old days" never lived in them.

Re:"free" market solution

[dbIII]

Low transaction costs are no help when you've been screwed out of the much larger difference between the lowest offer and the maximum you will accept.

Re: "free" market solution

[tolkienfan]

You're an idiot.
Hft companies don't hack into the communication channels between buyer and seller. They submit orders to the exchange just like anyone else. They just do a better job.

If you don't want to pay the spread, then join the bid or ask.

Re: "free" market solution

[dbIII]

I appear to have a stalker! Once again I suggest looking up how these large numbers of rapid, mostly cancelled, transactions work before laying on the insults.
It's a classic MITM attack in this case disrupting communication between a seller and a buyer.

Re: "free" market solution

[tolkienfan]

I've worked in HFT for about 8 years.
It is no such thing.

Re: "free" market solution

[dbIII]

So you would say to avoid being insulted Mr Frontrunner Insider. So you guys never do anything illegal - you've just worked out how to transmit news faster than the speed of light!

Re: "free" market solution

[tolkienfan]

Front running is impossible for us, since we don't have customers.
Inside information is unavailable for The same reason. We only trade off of public information. News and market data.
The only advantage that we have is that we're smart. Anyone can get the speed.
Trading off of leaked news ahead of time is illegal. I hope those fuckers are thrown in jail.

Re: "free" market solution

[dbIII]

Assuming you are talented at anything at all you are wasted just as much as those people in Indian call centres that can speak English but are stuck doing fake malware scams. As someone in the middle doing nothing but driving up prices you are employed by scum a step lower than spammers.

Re:"free" market solution

[tolkienfan]

It's easy to prove that market makers offer the best prices.

If market makers didn't offer the best prices, THEY WOULDN'T GET MATCHED. By matching rules and by law (see NBBO) exchanges are only allowed to match at the best price. No matches means no trades means no profit - the market maker couldn't exist. QED

For another angle, just look at the spreads, noting that they keep buys and sells on the book almost all the time.

Take Microsoft. Suppose the best bid is at $33.27 and the best offer is at $33.28. If someone buys and sells at these prices they only lose 1c per share. That's the least possible.

Note that if you don't want to pay the spread to the market maker (most people don't care about that 1c...) YOU DON'T HAVE TO. You can simply join the bid... e.g. submit a limit order to buy @ $33.27 in the preceding example.

If you make a mistake, and submit your limit order to buy at $34.50, you'll get price improved and match the best offer of $33.28. (I don't complain about getting shafted when this happens...)

Lastly, realize that before HFT the spreads were much wider - as much at 25 times. Market makers (the "specialist") in the past had colluded to keep the spreads wide so they could make more profit. Competition with HFT has ended the reign of the specialist. Do we get any thanks??

On the subject of risk and profit that would go to the investor, HFT is profiting from tiny fluctuations that occur in subsecond durations. No investor can hope to profit from such. Suppose you want to buy a bunch of Microsoft. The price is going to bounce around... 33.27/33.28, 33.26/33.39, 33.27/33.28, 33.28/33.39... and so on. The investor has no guarantee of getting any particular price. They can submit a limit order, say buy for no more than 33.28, but by the time the order gets into the marketplace the price may have increased, resulting in no match. Instead, most investors will submit a market order and accept that they will be paying part of the spread, but they're (almost) guaranteed immediate execution.

For the market maker it's the opposite. If they're very good they make a mean of 0.5c per trade for long periods. BUT, when there is a big event that moves the price dramatically they risk being swept. E.g. Suppose MSFT jumps to 33.35. Some other HFT trader will submit a sweep order to buy a large volume at, say, 33.34. The exchange will match all the market makers quotes (all the volume) at all the prices from 33.28 thru 33.34. The market maker sold large volume at prices between 33.28 and 33.34, but now the best bid is at 33.35. The market maker has lost big time... and this happens all the time. To mitigate this, the market maker tries to move his mispriced quotes to the new offer of 33.36 and above. But this takes time, and the quotes are at the exchange like sitting ducks.
Market making is very difficult to make profitable. They make small consistent gains, interrupted by big losses. Hopefully in aggregate they profit. Otherwise they go out of business.

Now take the same example, but with no market makers. Without market makers, there isn't any reason for the spreads to be so narrow... narrow spreads (as I've just explained) are very risky. So you can safely assume a bigger spread - call it 10c for simplicity. Say then that MSFT is at 33.22/33.32. The investor is now paying 10 times as much (on average). Who ever is at top of book is still in a risky position, but they mitigate it by keeping the spreads wide - now if the value of MSFT jumps up to 33.355 (between 33.35 and 33.36), only a couple of price levels are at risk of being swept, so there is less risk.

Re:"free" market solution

[smaddox]

Thank you for the lengthy explanation. I do think I understand better, now, the argument for HFT. However, your argument for HFT seems to be based solely on the idea that it reduces margins between sellers and buyers, in effect my keeping transaction costs low.

My problem with your argument is that you assume small margins between sellers and buyers is a good thing. Good for day traders and HFTs, maybe, but good for long term investors, I'm not so sure. In fact, I think one could make a solid argument that large transaction costs are preferable for minimizing market volatility. Yes, large transaction costs would also reduce liquidity, but who ever said stocks should be highly liquid? If you want a liquid asset, stay in cash.

Ultimately stocks were created to allow companies to raise long term capital, and for long-term investors to take partial stake in said company. Day trading and HFT are perversions of a system originally developed for long term investment. The current situation of rampant day trading and high-frequency trading taxes the long term investors by introducing high market volatility. My disgust over why these activities were not banned 30 years ago remains.

buy buy sell buy buy sell sell jump.

[znrt]

We should be surprised? Porn has driven more technological advances than most will ever care to admit or acknowledge.

not nearly as much as warfare.

regarding the news, if merely bypassing some local communication api layers yields such a signifficant performance boost, one has to wonder what the decision-making algorithms actually do. obligatory: what could possibly go wrong?

Re: buy buy sell buy buy sell sell jump.

[jd2112]

if (likelihood-of-getting-caught == high)
{throw (EXCEPTION_POSSIBLE_ILLEGAL_TRADE)}
else {SetCompliance (IGNORE_ILLEGAL_TRADES)}

Lock-pickers

[rickb928]

Having a pick set either declares you as an intruder, or someone who loses their keys more often than the pick set...

HFT is morally thievery, ethically abusive, and deserves to be regulated as such.

OR, alternatively, brokers, market makers, and exchanges need to fully and repeatedly disclose to investors the nature and impact of HFT. Those of us trying to time the market are wasting our time, the HFT guys have this down to milliseconds. Trying to find arbitrage is impossible.

Of course, when the Fed stops blowing up this bubble, then the market will collapse to a lower level, and there will be other investment vehicles that can attract capital. Until then, your savings account and CD are paying zilch, so you buy funds and houses. Since banks really don't want to go back into the savings business where they are accountable to their true owners, the depositors, we are facing a Fed intrusion that has no end in sight. Until that ends, individual capital is almost superfluous. And the stock market is the only game in town for many of us.

My rental property looks real good right now.

Re:Lock-pickers

[rickb928]

Competitive, but thievery.

Re:Lock-pickers

[SleazyRidr]

Shoplifting is extremely competitive. If there are N shoplifters, only one will succeed in stealing the goodies, so N-1 are out of the game.

Re:Lock-pickers

[rickb928]

It would be equally correct that while HFT churns the market, it both creates and destroys liquidity, depending on the situation at the moment.

While human traders are left scrambling at the margins, and facing a market influenced greatly by these machines.

I personally no longer trade. Funds for the time being, looking for other vehicles. But traders are a few milliseconds from a flash crash that wipes them at the wrong time.

No real controls, not even the brokerage self-interest, prevents these. Just the coders, and the guys setting the variables. Not unlike human trading, except it is breathtakingly fast in HFT, and causes serious problems much much faster.

Ethically, HFT is nasty. IMHO.

Re:Who Stole 7 Milliseconds From the Federal Reser

[GameboyRMH]

This still doesn't enable FTL communications. The through-planet neutrino network suggested in that article is more likely.

Rewards

[Spazmania]

We need to stop rewarding folks for high-speed trading. It basically steals money from the folks genuinely invested in the companies whose stock is traded and adds no value to the system at all.

Re: Rewards

[tolkienfan]

What the fuck are you talking about?
The HFT company wouldn't be able to buy and sell a stock if the issuing company hadn't issued it. That company still has the funds they raised from the IPO regardless of whether some trader buys or sells it.
And how are HFT companies stealing from the investor? The investor isn't forced into buying from an HFT company. And if they do choose to, how would that be stealing?
If I buy and sell apples, I expect to make a profit from it. I doubt many would call that stealing.

The Fix is easy

[Archangel Michael]

The fix for High Frequency Trading is 5 minute rolling averages for all buy/sell orders. This would allow the free flow of capital with some level of price uncertainty that would clear out all the volume based on miniscule profits

This would be done by placing all trades into a five minute escrow account and once the five minutes is up, the trade is completed on the average price during those five minutes. Five minutes is huge in computer time, but not so big to humans. This would only affect non-human based trading.

Re:The Fix is easy

[jerdenn]

Absolutely true! In addition, that needs to be a "fuzzy" five minutes, plus or minus a non-determinate amount of time to prevent further gaming of the system.

The solution is simple. The will to implement it is not there - too much money and special interest in HFT.

simple life

[Tom]

Some things in life are simple:

Almost everyone agrees that HFT is evil.

Nothing is being done about it.

How can both of these things be true at the same time without revealing a serious, dangerous flaw in our political and economic system?

"Ethernet packets" don't exist

[module0000]

Someone please fact check before publishing summaries...Ethernet "packets" don't exist. Learn your networking 101 please.

(the segment of data is a FRAME, and may contain packet data)

Education for the win... http://en.wikipedia.org/wiki/Ethernet_frame

Re: Huh?

[Princeofcups]

No, this is arbitrage. Taking advantage of price differences within or between markets.

Correct. This is not the few high profile crocks in the system we've been reading about, this is a constant and persistent skimming of billions of pennies from every market, and depositing them directly into the hands of the traders with no benefit to anyone but themselves. I worked for traders years ago who did this via telephone. A trader in Milan, Chicago, Frankfurt, or London would see a slight difference in price on some treasury bond between their market and one of the others. They would then buy a ton of bonds on one exchange, and sell on the other. It was actually a little more complicated, because they did this with futures, but the result is the same. Pure unadulterated theft. And now they can do it even faster, without that telephone call.

Re:Who Stole 7 Milliseconds From the Federal Reser

[ggraham412]

The news you refer to was notable precisely because it is physically impossible for an electronic signal to get from DC to Chicago in the specified timeframe. I think your culprit is a leaker and accomplices guilty of insider trading, not HFT.

Re:Once again, the vast majority has no clue

[Anonymous Coward]

So, what are your thoughts on the technology?

Other uses for technology

[MatthiasF]

I can imagine this technology can be used for other practices, like a massively parallel world system used in games or simulations.

Cuts down on latency and routing issues with multi-node services by allowing switches to be temporary shared-data proxies.

Re:Other uses for technology

[dbIII]

Not really, since the constraint is "speed at any cost" while there is plenty of other work on speed while getting things right. If it's using shortcuts that are insane in a hostile network then it is of no value outside of HFT within the few months it takes before a competitor screws them up.

Too drastic

[dutchwhizzman]

Taxing every transaction would be too drastic. However, if you trade stock soon after you buy it, you are either gambling (taxable) or have prior knowledge (illegal). Assuming people that do that will be at least gambling, you should tax profit as gambling profits and not make losses tax deductible. Adding a 40% gambling tax on all gross profits made on each transaction that has a sale of the share within a week and putting the burden of bookkeeping of this on the gambler^Winvestor, will make it a lot less profitable to do HFT, but it wont hurt actual investors. Not only that, but it would give the government a nice income they can spend on improving the infrastructure of the USA and making government work better. In the same line, all derivative trades are basically gambling on a value going up or down, so should be taxed the same, unrelated to how long they run or when sold/purchased.

Re:Too drastic

[ShanghaiBill]

However, if you trade stock soon after you buy it, you are either gambling (taxable) or have prior knowledge (illegal).

Wrong. These are not the only reasons. A third reason is that you are a market maker, an integral part of the exchange system, that matches up buyers and sellers. You, as an individual, cannot just log in to the NYSE computers and grep for a buyer to sell to. You have to execute your trade through the system, which has relied on middlemen for more than a century. In the old days, the middlemen were men in the pits exchanging paper. Today, nearly all trades are facilitated by HFTers. This is because they can offer a better price to both the buyer and the seller, by reducing the transaction cost.

Going head to head

[alexander_686]

I think you missed my point.

The point with the dual listed stocks is that you have the same stock on 2 different exchanges – a quote based and a order based exchange. Going head to head the quote based system beat the order book system.

By the way, there are a many tricks that one can use the game a order book system. So you are not so much eliminating a problem as switching from one set of problems to another.

If cheaper and deeper markets (using empirical evidence) does not convince you what do you need?

Re:Going head to head

[vux984]

If cheaper and deeper markets (using empirical evidence) does not convince you what do you need?

What do I care about fake depth? People who want to buy and sell do so, if they don't they won't. I'm at a loss as to why we would so highly value liquidity and volume beyond what the market generates naturally, or how it helps the market itself.

And I'm not sure what you mean by "cheaper markets" -- cheaper in the sense that transactional costs are way down? To which I credit the computer age and say it's inevitable, while simultaneously pointing out that zeroing out transactional costs have led to some of the problems HFT etc cause. Some transactional drag on the system prevents abuse.

So you are not so much eliminating a problem as switching from one set of problems to another.

Is there a specific problem which you think is intractable?

Re:Going head to head

[alexander_686]

Look up Shortfall Implementation. That is the standard that I use.

There are explicit costs such as commissions (which you mentioned) and the bid/ask spread. The bid/ask spread has collapsed mainly because of algorithmic traders such as HFT, Costs here have fallen by over 90% over the past 20 years.

Then there are the implicit costs such as assurance of being able to execute a trade at a given price. Costs here have fallen by 60%. That is the markets are deeper. So it is not exactly fake depth. (Except maybe under extreme circumstances – but we don't have enough evidence yet.)

As for Quote vs. Book exchanges – I think the issues are intractable.

First, books exchanges have had issues where speculators figure out the structure of the book. This is done via self dealing (where the broker who runs the book), fraud (insider trading) or by being clever. If you can figure out the structure of the book you can game the system. Most books are stuffed with limit order and such.

  Second it is not a continuous market. Market makers face greater risk so spreads tend to be higher. The volumes tend to be lower so it is easier to manipulate the price. When there is a large price move Book exchanges tend to freeze up harder then quote exchanges.

I do think there are cases where order books are more efficient then quote driven markets. But those cases are where the market is thinner.

Finance benefits real economy again?

[manu0601]

That innovative product will probably be used for something else at some point.

Here we see finance that benefits the real economy, by developing a product instead of providing capital. How weird.

There's no detail so no clue is available

[dbIII]

Nor is there any discussion or curiosity about what actually happens in such code as far as HFT is concerned

Due to the extreme time constraints it's very likely to be as simple as possible and have to ignore many of the edge cases and error checking normal networking hardware has to worry about. That doesn't leave a lot to be interested about especially since we have no detail at all to talk about and it's boring to discuss what has been left and what the consequences of doing so are. Do you really want to see a lot of posts along the lines of "only an idiot would cut out ..." for something cut out because time is far more important than accuracy?

So we can blow up the economy even faster ..

[codeusirae]

So we can blow up the economy even faster ..

Just tax it

[jonwil]

Add a 0.0001% tax to all financial transactions. Has minimal effect on anyone buying shares to hold but makes HFT unviable.

Re:Who Stole 7 Milliseconds From the Federal Reser

[binary01]

Actually it had to do with the inability of the authors (and most commenters) to do simple math. The article said: "[...] were placed on Chicago exchanges 2-3 milliseconds after 2 pm." The speed-of-light-delay between the dc and chicago is 3.2 ms. So, no, not "physically impossible".

Wait, more HFT on Slashdot?

[Trogre]

Just so I understand this correctly.

Dedicated hardware is now being produced to allow bottom-dwelling scum to steal more of our money?

Re: Investors???

[tolkienfan]

They don't have to. Investors can trade with anyone they like. They can even buy direct from original issues if they like.
Of course, mostly people buy from HFT, because they have the best prices...

Re: Yes you are

[tolkienfan]

1 you don't have to pay the market maker. Join the ask or bid.
2. Arbitrage ensures that you get the best price regardless of where you trade. Without arbitrage you might get an advantage by choosing a different venue.
3 because of market makers, if you choose to take their price you're guaranteed to get a price within 1c of "current value".

Re:Who Stole 7 Milliseconds From the Federal Reser

[ggraham412]

According to the article posted elsewhere on slashdot about this:

Somebody placed massive orders for gold futures contracts betting on exactly that outcome within a millisecond or two of 2 p.m. that day -- before the seven milliseconds had passed that would allow the transmission of the information from the Fed's "lock-up" of media organizations who get an early look at the data and the arrival of that information at Chicago's futures markets

"within a millisecond or two" is still physically impossible given the 3.2 millisecond bound implied by the speed of light in a vacuum, but even the 2-3 millisecond figure quoted in your other article is much less than the actual fiber latency of about 6.5 milliseconds between Chicago and NYC (presumably similar between Chicago and DC), and is still somewhat less than the fastest microwave links available between NYC and Chicago, which come in at about 4.1 milliseconds. (I'm not sure there are any microwave links operational between Chicago and DC as of yet.) These figures are somewhat worse than physical speed of light bounds because they include actual geographical routes and hops, and an index of refraction in the fiber case.

Which is why there should be an investigation - it certainly looks like someone was sitting on the news beforehand and traded on it as soon as 2PM rolled around. But it could also be that a local news organization broke the news embargo ahead of Washington DC. If I understand the article, it seems like news organizations have access to such announcements beforehand so they can prepare ahead of time release their canned articles at the same time. That would be interesting to find out too - I can see local newsmen tipping off their trading buddies where/what to look at precisely 2PM, or just inaccurate network time synchronization.

Which exploits are you using then?

[dbIII]

So if you don't do those, which exploits are you running on the market to drive up prices and take a cut?

Re: Which exploits are you using then?

[tolkienfan]

What we do is legal, and either beneficial or at least neutral to the market place.
We don't manipulate prices or overload the exchanges. Indeed we have good relationships with the exchanges.
They, unlike most here, actually understand what we do.
The SEC and SROs actually monitor for bad behaviors, and I'm aware of huge fines. If anything is manipulative the exchanges will expel the firm - which is death for a trading company.
We also monitor ourselves and our traders... we have a large compliance department, and strict policies.
You have no idea how any of this works, but you still have strong opinions about it. You could fix your ignorance.

Re: Which exploits are you using then?

[dbIII]

Ok - if I have no idea please tell me - do you use known algorithms for exploits (script kiddy) or develop new ones (virus writer). I'm aware that these exploits are not currently illegal but that does not mean I approve of them.

We don't manipulate prices

I know it works by buying low and selling high as quickly as possible so please don't try to pretend it has no effect.

Re: Which exploits are you using then?

[tolkienfan]

I've been telling you, but there's something wrong with your brain.
We use forms of market making and arbitrage (which have existed long before computers).
Every buy and sell has an effect on the market place, and ours are no different. That doesn't make them manipulative.
I make no pretense, and I don't give a shit whether you approve. I reply mostly for the other readership on slashdot who may actually be interested in learning something.

Why do you keep making accusations with absolutely no evidence to back them up?

Re: Which exploits are you using then?

[tolkienfan]

BTW Buying low and selling high sounds like an amazing strategy. You are a genius.

It took too long.

[sergueyz]

The tech was there from the very beginning.

Ethernet encoding allows for pause in the data and also allows for canceling transmission of the packet by utilizing Link error code (risking that routers will complain about too many link errors).

Very strange, I'd say.

Prove me wrong then

[dbIII]

Prove me wrong then.
Describe how preventing the buyer and seller from communicating with each other and getting in first to screw both over is not an exploit - and don't give me that shit about doing such a thing not being a form of manipulating prices - that is a very blatant lie and you know it.
Tell me how it benefits society in some way and is not mere parasitism and a total waste of talent of the people involved.
I'm waiting, but all you've supplied was pre-emptive insults and no actual justification for what you do. I'd like to hear how you benefit society. Also don't insult us with the liquidity crap since you vultures pounce on trades that other people are going to do anyway.

Re: Prove me wrong then

[tolkienfan]

There isn't any way for a trading company to get in between a buyer and seller. All three parties are submitting orders to an exchange, and the exchange (equity exchanges anyway, others have some more complex matching) matches on strict price, time priority.
The HFT company is never in the middle. The buyers and sellers can communicate with each other, and there isn't any way for an HFT firm to get in the middle.
Your whole underlying assumption is just plain wrong, so every conclusion you've based on it is in doubt.
HFT is, very simply, the result of traders competing with each other on time.
Understanding how liquidity and quicker price discovery requires a knowledge of how markets function, which you clearly don't have.
So explaining it would be an exercise in futility. You really want to know (probably not - it was merely rhetoric) you can easily find materials on economics.
Why do you think it's ok to make wild untrue claims, when you must be aware that you actually know nothing about the subject at all?
If you are truly interested, go learn how trading on an exchange works. Then I'll be more inclined to answer questions about HFT.

Re: Prove me wrong then

[tolkienfan]

It's clear that you aren't even reading my responses.
This is about as clear as I can make it:
We connect to exchanges over exchange provided networks using exchange provided protocols or APIs, just like any other exchange trader. We send orders, modifies and cancels, just like any other exchange trader.

Re: Prove me wrong then

[dbIII]

So if you are not an investor, not a producer and not providing a service how is it that you are not in the middle being a drain on all?
I have been reading your posts but you have not come close to addressing that fundamental flaw of HFT which makes it a non-producing drain on economies. You've just been trying to distract me with surface trivia instead of addressing the problem that you are inserting exploits into a communication channel (ie. taking advantage of people's trust that they are dealing with a genuine seller and getting a good deal while they are trading) and making money from it. That's why I brought up the script kiddie analogy as you should have worked out by now.

Re: Prove me wrong then

[tolkienfan]

I've explained well enough. It's not my fault you can't or won't understand.

Re: Prove me wrong then

[dbIII]

If someone who has been an engineer for decades cannot understand then you are most definitely not explaining it well. Such petty bullying by questioning the intelligence of others when you are unable or do not with to communicate clearly is a disgusting character flaw which does not help when you are trying to convince others that you are not a shyster.

Re: Prove me wrong then

[tolkienfan]

Here's an example of why arguing with you is futile.

You said: "Prove me wrong then. Describe how preventing the buyer and seller from communicating with each other and getting in first to screw both over is not an exploit - and don't give me that shit about doing such a thing not being a form of manipulating prices - that is a very blatant lie and you know it."

"Buyer" and "Seller" communicate with the exchange. There isn't any way an HFT firm can get in the middle. If Buyer and Seller have the same price and that happens to be the best price, the exchange will match those orders. There isn't anything any third party can do to prevent this. Your underlying assumption is just plain untrue. How can I prove it? You won't accept my word. You won't research it. You carefully maintain your ignorance.

If buyer or seller submit market orders, for example, then they will be matched with the best bid or the best ask. These are usually market makers, because market makers provide the best prices. By definition, since the exchange will only match at the best price.

If buyer submits an order to buy *higher* than the best ask (i.e. they offer to pay too much), they will be "price improved" and still get the best price (which is the HFTs worst price) - even though their price was less than optimal. Similarly for sells.

You keep claiming that the HFT firm is interfering - preventing the communication, or utilizing exploits or something. That's just a lie. You have no evidence of this (which I know for certain since it's impossible), you don't know how it works, and yet you keep stating the lie.

Sticking with market making for a moment, if buyer or seller doesn't want to pay the market maker, THEY DON'T HAVE TOO.
E.g. Suppose Microsoft has best bid/offer of 33.27/33.28
Buyer doesn't want to pay 33.28, he can simply submit a limit order at $33.27 (called joining the bid). He is now at the best bid. He isn't first in line, but after all the earlier orders at $33.27 are matched, he'll be next. Seller sold at $33.27, buyer bought at $33.27 and there isn't anything the HFT firms can do about it.

Most people don't care about the fraction of a penny extra they pay and simply submit market orders. That will guarantee they get to withing 1c of the best price.
In fact, you'll pay more to your broker in fees than you'll pay to the market maker.

The real character flaw here is you keep lying about my business without actually knowing anything at all about it. I'll happily debate anyone who is interested in a honest debate. But you bring nothing to the table, except accusations. Perhaps you're just trolling... if so I totally fell for it. If not, then I'm at a complete loss. You just keep repeating the same lie with nothing to back it up, and expect me to come up with proof that I'm benefiting society - which I never claimed, btw. I claimed that market making and arbitrage are good for the markets. Nothing more.

Re: Prove me wrong then

[dbIII]

Most people don't care about the fraction of a penny extra they pay

Back in the day there was a movie where Superman stepped in to stop exactly such a plan :) "Most people" seemed to see it as morally wrong before HFT turned it from fiction into reality.
You still haven't justified it - please stop reguritating the obvious about markets and instead get to the bit where HFT comes in and takes advantage of others without HFT.

Re: Prove me wrong then

[tolkienfan]

How is it taking advantage?
Pete wants to by MSFT. He can pay the market maker (likely, but not necessarily - any trader could have an order at the best price) $33.28. Or he can stick to his price of $33.27 and wait... but he might not get matched immediately. Indeed he might not get matched at all. The price could shoot up...
HE chooses whether to pay the market maker. He does so because the market maker guarantees a level of service - you'll not get a price further that 1c from the actual value, and you'll get immediate execution - your price is locked in. This is the best possible deal anyone can offer (since there is always at least a 1c spread in equities)!
Again - since it's Pete's choice, how is that taking advantage?

typo above

[dbIII]

s/do not with to/do not wish to/

Follow the money

[dbIII]

So when Pete buys from Paul and you get a cut from their transaction how is that helping anyone? They could just as easily sell to each other if HFT didn't exist and one of those two would be getting the benefit you are getting.
Why do you skirt around such a simple issue and call people "idiots" just for bringing it up?

Re: Follow the money

[tolkienfan]

I explained all this
Ask Pete. And Paul, for that matter, since it's their choice.
If either avoids the market maker one will very likely pay more or receive less. It will also take longer.

Re: Follow the money

[dbIII]

Your simplistic assertion that communication cannot be disrupted in any other way than a one dimensional person to person situation when the reality is a broadcast with race conditions is insulting everyone's intelligence - especially your own.

Re: Follow the money

[tolkienfan]

There you go again, asserting lies with no evidence. Is this what gets you off?

Re: Follow the money

[dbIII]

Your post has utterly nothing to do with mine. You just failed the Turing test yet have the audacity to call others idiots just for asking questions. Should we just replace you with a bot spawning random insults?
I really detest script kiddies and you appear to be defending using scripts to disrupt financial markets, drive up prices and get a cut with zero benefit to anyone else. That's very nasty malware in my view. What will you do with your resume when markets contract enough that such parasites can no longer be supported and your "trade" is made illegal? What will you put in the eight year hole to make yourself employable?

Re: Follow the money

[tolkienfan]

It does. You implied (I said asserted, and I stand by that) that we disrupt the communication channels of other market participants. This is a lie that you made up. You have no evidence whatsoever for it, yet you keep asserting it.
How does what I said defend using scripts to disrupt financial markets? I've said no such thing. I challenge you to quote me on this. In fact, I claim that what we do lowers volatility, increases liquidity, reduces spreads and aids price discovery... All these things are good for the markets.
HFT does not drive up prices. It's neutral to prices. HFT works best when there is high volatility, and it essentially feeds off the volatility, thereby reducing it and extracting a profit.
Market makers and arbitrageurs are not parasites. Both of these things are a natural result of free markets. HFT makes these things more efficient. That's all there is to it.
Where is your evidence? I called you an idiot, not for honest questions, but for ridiculous false accusations.

Re: Follow the money

[dbIII]

Your posts with all these evasions, pretended stupidity and pre-emptive insults have led me to have an extremely low opinion of you. Try your shell game on somebody else, you've provided nothing but misdirection and illusion to try to justify a "trade" so morally twisted that a comic book movie villain was depicted as evil merely for perpetrating such a parasitic draining of cash from the market with zero benefit to anyone else.
You disgust me as do all script kiddies and malware writers, even more so because you are deploying your malware on the financial market.

HFT does not drive up prices. It's neutral to prices

How fucking stupid do you think we are? Your "idiots" was wishful thinking, hoping that the pool of marks for your race condition scams stays large.