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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.
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?
Your first trade once per second is free.
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.
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?
Every sale is a receipt transaction. Every receipt transaction pays a 3% tax.
Your capital gains in your retirement/savings account and your regular income get taxed at 3% instead of 10-15-20% or a marginal income rate. If you work for a living and invest as a long term play you pay very little taxes. You game the system and try and make money on the margins and through high volume and you face huge taxes.
Is it just my observation, or are there way too many stupid people in the world?
these are purely middle men that do nothing more than raise the prices of the commodity they're working with
Actually, they are middle men that lower the price of the commodity. You should look at the history of transaction costs before and after the adoption of HFT. The have fallen dramatically. If they didn't offer better prices, why would anyone trade with them?
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
You have a weird mental model of how stock markets work. They have always relied on middle men to execute the trades. The only difference today, is that the HFTers are far more efficient.
Middle men can have value: for example, the grocery store, distributors, etc are middle men between you and a farmer. Does that make them evil?
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Because we can
Barbarians = One who would argue the length of a fiber connection to his server costed him $X in lost profits from HFT.
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"?
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.
That's the entire financial sector in a nutshell. A bunch of people moving numbers on a balance sheet and imagining they are more important to progress than the people who actually invent new things and the many many more people who actually build them. It's rent seeking at it's worst.
Put 5 bankers in a room with a broken toilet and you'll have to piss on the floor. Add one plumber to the mix and all is well. So who is the important person there?(assuming you don't enjoy slipping and falling in piss)
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.
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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
Now you're outright misleading everyone.
Firstly: No-one chooses whom they trade with on an exchange. The exchange computers match up buyers to sellers. No-one asks for the HFT traders to come in, but has to live with the consequences of their entry as long as they continue to trade.
Secondly: While it is true that at most given instants HFT firms will currently provide the "best" price, this is not true over longer time periods. If there were enforced time delays in the exchange, sellers could wait a second or so to receive a better price, and buyers would pay the same or less without a HFT middleman jumping into the trade between milliseconds.
HFT is turning modern commodity and stock markets into a farce. Sooner or later, buyers and sellers are going to take their balls and go home.
May the Maths Be with you!
"the system could, and should, do without them"
I lol'd at that. Yes. Lets get rid of the market makers. That would make things SOOOO much cheaper and fairer right?
For fucks sake, this would almost certainly lead to tons more insider deals, as everything would have to be a direct placement. Want Goldman to get prices 20% lower then a retail investor? Try this out.
You can't put the plumber in the room if you can't pay him.
The plumber can't fix shit if he doesn't have the capital to buy tools.
The economy grows when banks and investors give money to people with ideas. Take away either and everything stops. Large parts of the economy are effectively stalled right now because of massive inefficiencies in the banking system. Many of these inefficiencies are a direct result of some government regulations.
The Fed has basically made money free for banks, however individuals and small business can barely get loans. Want to know why? Regulations have made the cost of lending too high for banks to make a profit on small loans. The fair banking act has made evaluating non fico type data basically illegal for the banks, so risk cannot be be priced people who would otherwise be very credit worthy. This has made loans impossible to get for many, more expensive for most.
Your plumber now can't hire or expand or buy tools.
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.
You also can't fix the toilet if you don't know how to fix the toilet. So why do the 5 finance guys get a million bux a year each? The plumber without a loan is more likely to get the toilet working than the banker without a plumber.
Most of banking and finance seems to have little to do with loaning money or investing in good ideas (that's one reason we need Glass-Steagall back). The loans drying up is mostly because these days banks make more money selling funny paper to each other than they do making legitimate loans.
The HFT guys neither invest nor loan.
The problem is actually too little enforcement of what little regulation there is. March a few execs from GS and friends off to jail and things might improve.
Again you are spouting bullshit. HFT has no effect on transaction costs. People were trading in pennies and even half pennies long before HFT took off. HFT brings ABSOLUTELY NOTHING to the table. Liquidity? Its fake. Where is that liquidity when news comes out? Gone. Hiding. What has happened to the order book? HFT has single handedly destroyed the markets for everyone else who used to participate.
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!
Gee.. what ever did the exchanges do before HFT? There must have been no trading! Were there market makers? Like those people who qoute two sided prices upon request? Heavens no. And thats equities. Don't even get me started on FX. I think before 2007 the exchanges all used telegraphs and spreads were 10% wide. And there was no order book. To think that real investors might actually leave their interests with a broker for more than the next two pips in price.
HF traders are not market makers as they pick and chose when and where they want to participate unlike a true market maker who must be two sided and available at all times. HF traders are opportunistic whores. Whether they are fucking the rest of the market (ie, non-HFT traders and investors) or each other is iimmaterial.
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".
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.