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Barbarians At the Gateways
CowboyRobot writes "Former high-frequency trader Jacob Loveless gives an in-depth description of the math and technology involved in HFT. From the article: 'The first step in HFT is to place the systems where the exchanges are. Light passing through fiber takes 49 microseconds to travel 10,000 meters, and that's all the time available in many cases. In New York, there are at least six data centers you need to collocate in to be competitive in equities. In other assets (foreign exchange, for example), you need only one or two in New York, but you also need one in London and probably one in Chicago. The problem of collocation seems straightforward: 1. Contact data center. 2. Negotiate contract. 3. Profit. The details, however, are where the first systems problem arises. The real estate is extremely expensive, and the cost of power is an ever-crushing force on the bottom line. A 17.3-kilowatt cabinet will run $14,000 per month. Assuming a modest HFT draw of 750 watts per server, 17 kilowatts can be taken by 23 servers. It's also important to ensure you get the right collocation. In many markets, the length of the cable within the same building is a competitive advantage. Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.'"
But writing an article on a topic this boring and tricking me into reading it by sneaking in the word "barbarians" should be a crime.
Very informative, enjoyed it a lot.
Please, I just pray nobody justifies this obvious non-productive activity by explaining it lends necessary liquidity to the markets. The markets were liquid enough for me back when telegraphs were used to send messages to human traders.
Please enlighten me, dear wizards of the wall street. Please teach me what purpose HFT serves to our economy.
Somehow, to me this just looks like it is the most blatant proof that the whole stock trade has become a self serving gambling place without any connection to reality and economy anymore. It used to serve the purpose of accumulating money for projects larger than what any single person or even government could finance. Today, it is just a self serving leech on our economy.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.
what a fucking waste of resources
Salon must have known we'd be discussing this- they posted a story advocating a financial transaction tax:
http://www.salon.com/2013/10/18/the_tax_that_could_save_america_from_wall_street_partner/
I find the technology behind HFT pretty fascinating, the level of optimization is impressive and right out there on the bleeding edge. IIRC there are switches being developed with trading algorithms right in the silicon. I just wished they had something to show for all that work. I'm perfectly ok with the levels of profit and gain but show me a widget or something of value that was produced from the labor. The usual answer you get from this question is liquidity and allocation of capital but if the inventors would be honest with themselves they would realize that's not the case. Trades happening at minute resolution by a human would provide the same level of capital allocation and liquidity as trades happening at the microsecond resolution by machines.
I came to the datacenter drunk with a fake ID, don't you want to be just like me?
I would image it's about as useful to society too.
Isn't HFT just insider trading?
Insider trading = making stock trades using information that has not yet been disseminated to the open market.
HFT trading = using mathematical algorithms to detect the reaction of the open market to information, and to get ahead of it to make advantageous trades before the entire market can react.
The fact that trades are held a mere fraction of a second sends one undeniable message - these are purely middle men that do nothing more than raise the prices of the commodity they're working with - the system could, and should, do without them. They server no benefit to the actual users who are using the system as it was intended and globally designed
Forget "income" - change toa gross receipts tax. It only requires a couple percent (well, maybe up to 4) to have a sustainable tax base. You pay your real estate agent 6% to sell your house, you pay most brokers 2-4%, you should probably kick in a couple percent for the government defending that investment with nuclear weapons.
No deductions, no exclusions. Whatever you receive, you pay 3% to the feds. My town happens to have a GRT for business and it's quite difficult to dodge. It makes HFT and short term, high volume trades a losing proposition. It effectively punishes any entity - person or corporation - which does not add value to a transaction. And that, imho, would be a good thing.
Is it just my observation, or are there way too many stupid people in the world?
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Because we can
Find the closest data center and lease enough space to run a high speed router...
Then get your own fiber to a cheaper place with as direct a line as possible. Or, colo that router directly with a telco or some space on the trading floor, somehow.
Barbarians = One who would argue the length of a fiber connection to his server costed him $X in lost profits from HFT.
Step 3 = Profit. - Funny
HFT Does add incredible liquidity , making markets more fare for the retail investor. Penny wide markets.
HFT has added great technology to the business and eventually that technology developed by HFT firms has made its way to retail investors.
HFT firms have to pay for every order/ cancelled trades etc not, supporting the markets and reducing the cost to the retail trader.
If is is so easy, then spend millions developing technology, implement that technology, and profit. If you think these firms make money because they get the news 3 mS before everyone else, you are wrong.
Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.
That just seems silly. They should be charging higher rents for the shorter cables.
HFT is innocuous when it works. When it goes haywire, it can have very real consequences. Have you already forgotten the "flash crash"?
The stock market is already a highly-regulated entity. Not in the sense of pollution regulation or safety regulation.. the stock market as we know it exists within the confines of regulation, in precisely the same way a rulebook creates a game (like chess or checkers). The stock market *exists* because of its regulations.
With that in mind, the game can just be altered at whim by those who write the rulebook with no need for moral outrage, since there is no 'free market' of stock markets in the first place.
I price out data center space (among other things) for a living, and punching in a rack consuming that amount of power in our considerably more remote data center, and using our default profit margins, it didn't come out that much cheaper.
What a tremendous and disgusting waste. This trading does nothing for the economy; it just creates a few billionaires while skimming from pension and retirement funds. Wall Street at it worst.
And as is being asked above, how does this benefit buyers ?
deleting the extra space after periods so i can stay relevant, yeah.
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By partnering the same software at 2 different distances from the exchange, the further software could know what decisions its alternate had just made, prior to the most current trading signals reaching it. It could then pre-compute and send responses to the predicted reactions of competing algorithms to the initial trade based on past responses of those competing algorithms.
br>The nearer algorithm likewise will know to expect that responses from the further algorithm will be made prior to them being sent.
This could allow a resonance to be set up against other competing trading algorithms by provoking responses with the nearer algorithm and reacting to them instantaneously from the further location, since the distance from the exchange buys the further algorithm the compute time for the response and the opportunity to synchronize its actions with the first algorithm.
Tax each one of these transactions at $0.01 each.
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It benefits buyers as equally as sellers.
It used to be that market makers took $.125 on each stock traded. Now the middle man takes $.001 per stock. The buyer’s and seller’s cost drop by $.12 so each person’s cost drops by $.06
Lots of argument for and against HFTs here. I think it's unproductive without knowing some facts:
1) HFT is a catch all word for computer assisted trading that happens faster than a second. This is similar to, say, 'vehicle' categorizes objects with wheels.
2) HFT can be split into sub categories, market makers (knight capital, getco, etc), brokers (Merrill Lynch, JP Morgan, etc) and buy side (hedge funds, etc). Back to vehicle analogy, they are like bikes, taxis and trucks.
3) market makers are obliged to provide liquidity to markets. They have to buy/sell stocks at a fair price given market condition. They earn commission from buy sell price differential (bid ask spread). So like bikes in NYC, they aggressively get things delivered. HFT technology is used so that they can be in front of the queue, ready to serve.
4) brokers help investors buy sell stocks. They use HFT to deliver best price by routing buy sell orders around many different exchanges. If they execute stocks without HFT then markets will move and investors lose out. This is like a taxi routing through narrow, scary streets to get a passenger to a destine as quickly as possible.
5) Buy side are firms that invest in financial markets. It can be a nimble hedge fund (like a pickup truck) or a ridiculously big pension fund (like a rig). They manage money by investing in shares, etc, allowing companies to obtain good value financing. Think IPOs or bonds. Typically hedge funds are the users of HFTs, and pension funds then invest in these hedge funds to diversify their strategy. It's like a delivering companies have big trucks and small trucks, so if traffic is really bad, at least small trucks can deliver some goods.
6) Pension funds are actually the biggest players in financial markets. They have huge amount of capital, and must obtain returns for retirements. If you have any kind of pension plans, you are almost surely benefiting from HFTs.
7) flash crashes happen. Growing number of participants make financial markets complex. HFTs make it hard for humans to monitor any anomalies. Like roads, we need to have sensible regulations but accidents will always happen.
Apologies for any typos, since I am using my iPhone to post.
Probably the only one barbarian that got away, trying to get back. But it seems they prefer to destroy the world rather than keeping him/her/it locked up. Not even with the excuse of a possible European Union... And for my experience they are probably right. I hope Rome 2.0 will be more successful (and I am pretty sure we should be using romes instead of euros). And I am not talking about any English-speaking world, as it seem to have been poisoned beyond repair, especially since they voluntarily prefer the poison ("Barbarians At the Gateways" :))))))))). I am seriously (poor Siria since foreigners got there) beginning to think the Bible was made on purpose for the universe whose centre is the English-speaking world.
Because people resent those who get rich doing something most can't understand.
Or they can just leave that part of the rulebook alone. I find it puzzling how people are arguing for banning of an activity not on the basis of it causing harm but on the basis that the banning isn't going to cause a lot of harm.
My thinking is that you should have a damn good reason for banning something. Not a vacuous "It doesn't hurt that many people".
Dang LPB
If a general contractor takes in 100K to build a house, but the vast majority of that is actually in materials cost, why should the town get a percentage of the cost of the supplies? And how do you prevent double-dipping, where they get a cut of the cost of the supplies from the general contractor, and the building company, and the lumber yard, and the wholesaler...
If the speed of light means that you need to physically have a compute in the exchange to react in time, is that information really "public" in the larger sense?
To me, "public" information means that joe trader sitting at home has access to it.
Just because *you* don't see a useful purpose does not exist.
Then demonstrate that a useful purpose exists with actual data. Yeah yeah, "market liquidity". Why do markets need to be liquid on the microsecond scale? Prove that there is a benefit to this.
And, just because a useful purpose may not exist, does not mean it should be outlawed.
It should be outlawed because it steals money from people who are investing in companies that do serve a useful purpose. Any money that ends up in the hands of arbitrageurs is money that would otherwise have ended up in the pockets of actual investors. Since no useful service is being performed, that might as well be fraud.
How about we outlaw your watching American Idol and facebooking as well, since it does not serve a useful purpose?
Because I'm not taking anything from anyone when I do that.
Give me Classic Slashdot or give me death!
That's just not right. Arbitrage is a very useful function. In particular arbitrage equilibrium to exist for general economic equilibrium to exist. This implies existence of price stability.
HFT is just the inevitable end game when there are companies competing to arbitrage prices across markets. The more competitive it is the less profitable will be.
HFT is squeezing the nuts of arbs across the world. Because the price differences are always decreasing the ability to extract money from the trading system by arbs is decreasing all the time. The result is smaller buy/sell
This particular article is clear illustration of this. If power to run the HFT servers is a determining factor in the profitability of HFT, surely the margins are razor thin.
Further reading:
http://en.wikipedia.org/wiki/Arbitrage
http://en.wikipedia.org/wiki/Economic_equilibrium
http://www.businessweek.com/articles/2013-06-06/how-the-robots-lost-high-frequency-tradings-rise-and-fall
http://web.eecs.umich.edu/~kulesza/pubs/hft_jot10.pdf
So if I want to buy 1000 shares of Coca-Cola, I can expect the 'market makers' to take $0.10 for their troubles.
I assume this doesn't include custody, etc.
And I suspect you are full of it. think NYSE, and find me a broker that charges less than $5 for an online trade for a simple trade. This example would, right now, be around $3878.00, so it should fit most discount houses minimums. E-Trade would maybe charge the $9.95 or less, but even half of that seems like $.05/share, not $.001/share.
And that's cheap, and was like that before HFT was skimming liquidity out of the market.
BTW, $.125/share would have cost me $12.50 for this share. If only I could get it for $0.10. No, fees aren't lower because HFT makes it anything. the HFT guys merely engage in arbitrage. This was once considered 'sharp practice', and not confused with good business or even honest.
Can't wait to see them bail when the correction comes. And maybe never come back. We think the DJIA swings big when it varies 0.96%, which is the gain since 10/8. narrowing the spread is the best thing going for the brokerages. They always risk-shift, and this is fabulous for that.
deleting the extra space after periods so i can stay relevant, yeah.
Prove that there is a benefit to this.
Nice try at shifting the burden of proof. You're the one wanting it outlawed. It is your job to prove that it actually "steals money from people".
> Why are such articles full of people wanting to outlaw or restrict HFT?
Because the insane amounts of money made by HF traders without (apparently) serving a useful purpose clashes with the idea of economic justice. We like to think that the amount of money one makes more-or-less reflects how much they contribute to the society. It seems *fair* that doctors make a lot of money, because they *deserve* it in exchange for the lives they save. But most people see a staggering disparity between the amount of money HF traders make and the social good they create. The disparity is so ludicrous that the very idea that one's wealth indicates one's social worth is thrown out of the window.
> How about we outlaw your watching American Idol and facebooking as well, since it does not serve a useful purpose?
I don't make a million dollars watching American Idol and facebooking.
That was great. I'd like to add this two-and-a-half minute clip from Bill Maher :
http://www.youtube.com/watch?v=SASkrBbIBJs
You are right, HFT do not lower fees. Never claimed they did. I am not talking about commison (as in your example) nor custody. I was refering to the bid-ask spread. This is a extra cost on top of your commision. It will not show up on your trade ticket since it is a implict cost. Think of it as friction.
http://www.investopedia.com/articles/trading/121701.asp.
great video, thanks
The solution to the problem is for the government to place a small tax on every trade so the microsecond buy/ sell trades profits would be nullified. I believe this would restore some sense to the stock exchange.
My karma is bad. Don't get too close!!!