Barbarians At the Gateways

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Posted by Soulskill on Friday October 18, 2013 @04:26AM from the our-stock-economy-is-stupid dept.

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.'"

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Liquidity by Anonymous Coward · 2013-10-18 04:34 · Score: 5, Insightful

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.
1. Re:Liquidity by JustOK · 2013-10-18 04:43 · Score: 3, Funny
  
  The signal was taking too long to cross your lawn. So we foreclosed your house. Bye.
  
  --
  rewriting history since 2109
2. Re:Liquidity by kajsocc · 2013-10-18 06:11 · Score: 5, Funny
  
  a HFT system will notice the spread, but from one at 11 and sell it to the other at 10 and capture the difference for themselves.
  I would not recommend buying high and selling low as a long-term strategy.
3. Re:Liquidity by the_other_chewey · 2013-10-18 06:13 · Score: 3, Funny
  
  a HFT system will notice the spread, but from one at 11 and sell it to the other at 10 and capture the difference for themselves.
  So I guess they make it up on volume?
4. Re:Liquidity by Copid · 2013-10-18 07:35 · Score: 4, Insightful
  
  This is the point I always make. There have always been useless lumps who happen to be close to the action who make money off of the spreads. There are just more of them now, and they're fighting really fast over micropennies. If we're going to complain, I'd like to see evidence that the total profit these guys are making is going up relative to the size of the market. Sure, if they're giving the average trader a huge haircut, that's not a good thing, but market efficiencies being what they are, I suspect that the total amount of skim hasn't changed all that much since the early days.
  
  The only real problem I can think of is that we've replaced that useless lump who has no real skills with mathetmaticians and engineers who could be doing something more useful elsewhere. It's probably not a great use of those resources, but it's pretty small scale.
  
  --
  An interesting anagram of "BANACH TARSKI" is "BANACH TARSKI BANACH TARSKI"
5. Re:Liquidity by DCFusor · 2013-10-18 07:43 · Score: 4, Interesting
  
  Trader myself. Mod parents up - they are correct. Check the Knight trading debacle: http://www.coultersmithing.com/forums/viewtopic.php?f=51&t=328&p=3924&hilit=knight#p3924
  The deployed their test harness instead of their HFT bots for 44 min and lost half a billion in that time - now out of business. I made good money during that time using human judgement. You can often catch an accidental high bid or low ask from an HFT, when they screw up, which is fairly often, as well.
  
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  Why guess when you can know? Measure!
What purpose does HFT serve? by Opportunist · 2013-10-18 04:35 · Score: 5, Insightful

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.
1. Re:What purpose does HFT serve? by Impy+the+Impiuos+Imp · 2013-10-18 04:43 · Score: 5, Informative
  
  This isn't even gambling. It's pseudo-precognition, taking advantage of price differentials between computers in different cities or buildings, before the other guy's system promulgates the updated price.
  
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  (-1: Post disagrees with my already-settled worldview) is not a valid mod option.
2. Re:What purpose does HFT serve? by mythosaz · 2013-10-18 04:45 · Score: 5, Insightful
  
  I'm obviously a rube with regards to how the magic happens beyond "Strike first, strike fast, strike often!" but it's pretty fucking clear to everyone that Average Joe doesn't benefit one bit from this unless he's bought stock in SuperHFT TradeCo.
  Nobody benefits from this except 1/100th of 1%'ers trying to move into the 1/1000th of 1%'ers at the sake of making sure that you or I can't possibly play, because the playing field is so un-level it's a miracle we don't slide right off it... ...after leaving our wallets.
3. Re:What purpose does HFT serve? by mcrbids · 2013-10-18 04:48 · Score: 5, Interesting
  
  We slid off the playing field years ago. This video takes just six minutes. It's a factual demonstration of just how skewed the system really is.
  
  --
  I have no problem with your religion until you decide it's reason to deprive others of the truth.
4. Re:What purpose does HFT serve? by Ubi_NL · 2013-10-18 04:49 · Score: 4, Informative
  
  The Zeconomist has a debate about it
  http://www.economist.com/debate/days/view/816
  
  --
  
  If an experiment works, something has gone wrong.
5. Re:What purpose does HFT serve? by ShanghaiBill · 2013-10-18 04:53 · Score: 5, Informative
  
  Please teach me what purpose HFT serves to our economy.
  This question has been beaten to death every time a HFT related article is posted. But people still ask, so I will try to answer. 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 they 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 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.
6. Re:What purpose does HFT serve? by Anonymous Coward · 2013-10-18 05:00 · Score: 5, Interesting
  
  It's a technical form of arbitrage, which is not illegal and may improve market liquidity. I think the downside is that trades are made on the basis of inferred choices and this distorts the real market influence of "People who invest" versus "Machines that exploit market mechanics." The former requires contextual analysis and the ability to evaluate products, management teams, etc. The latter is a numbers game of pre-destined metric comparison, equivalent to banal tasks such as gold farming in an MMORPG.
7. Re:What purpose does HFT serve? by kajsocc · 2013-10-18 05:10 · Score: 4, Informative
  
  Please teach me what purpose HFT serves to our economy.
  The best analogy I've heard is to transportation / shipping. Back when such transport was new, people scoffed at the idea of making money for moving things around. "You aren't producing anything, making anything, it's a complete waste." But today, we can see how moving goods around is actually of extreme importance.
  
  Trading moves another kind of economic good--capital. That is, trading is to capital as transportation is to physical goods.
  
  High-frequency trading is just trading... but faster. You'll notice how the summary mentioned New York and London. This is because the HFTs are arbitraging between those two major exchanges. If they were slower, you'd have more people getting "incorrect" prices, in the sense that there was a better price in NY but the information hadn't been priced into the London exchange yet. Hence, London traders would be getting screwed out of better deals that they technically could have known about.
  
  However, HFT has also become associated with a bunch of "dirty tricks", like flash trading, etc. These kinds of things actually CAN hurt investors and other traders. This gives HFT as a whole a bad name, as it is viewed negatively by those who feel they are taken advantage of by these tricks.
  
  In general, though, HFT has lowered market spreads, meaning it costs less to trade. Those lower costs show up in investors' bottom lines, which obviously include retirement accounts, so a lot of people are helped by HFT. However, I think a lot of people believe that without HFT, money would simply not be "leeched out", because they view traders as middlemen who are price gouging. The problem with this view is that all trading requires either paying middlemen, paying the spread, or taking on risk like traders do. So, take out the middlemen and you'll just pay higher spreads or incur larger risks, both of which are real costs, economically-speaking.
  
  Another thing is that if you check the trading volumes, you'll see that HFT makes up a substantial (50+%) of trading volume. People I've talked to often think this equates to 50% of the "profit" leeched by HFT. This is not so at all... the reason they have such high volumes is they'll buy and sell multiple things simultaneously, then trade back to a fully-hedged position moments later or at least by the end of the trading day. As an HFTer you might buy 100,000 contracts and sell them a bit later and net just $5-10 for the whole thing. Of course, there might be thousands of such opportunities in a given trading day, if you're a large firm with a competitive HFT program. As such, this type of trading incurs a very high volume-to-profit ratio. On top of that, a substantial portion of their would-be profits are eaten up by trading fees. And then, as the summary mentions, you've got substantial electricity costs, top-end hardware costs, collocation costs (which can be obscenely expensive for the prime real estate locations), etc., so it's not at all like HFT is making money hand over fist.
  
  HFT was a big thing a few years ago because it was a new thing, there wasn't much competition, and the profits were fierce. Now it's just the competition that is fierce.
8. Re:What purpose does HFT serve? by Anonymous Coward · 2013-10-18 05:11 · Score: 5, Informative
  
  Please teach me what purpose HFT serves to our economy.
  ... they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade.
  Umm, bullshit. The exchange is supposed to match up buyers and sellers. That's what exchanges are FOR. If there is a buyer but no seller, then the market maker steps in and sells at a higher price. If there is no buyer, the market maker buys at a lower price. This is how price movements happen. HFT is a middleman. If there is no buyer or seller, then HFT wouldn't go in on the trade at all. If there is a buyer and a seller, HFT does not need to exist, since the exchange is supposed to match up the two parties already.
9. Re:What purpose does HFT serve? by Prune · 2013-10-18 05:16 · Score: 3, Insightful
  
  >The little people live their lives by a small handful of metaphors.
  
  Your post is otherwise insightful, but the derision expressed by that statement counteracts the value you've brought to the discussion. As for your comment on bankers: holding your money is indeed half of the job of retail bankers (the other half being to lend to loan-worthy borrowers, which includes the oft-neglected part of actually determining who is loan-worthy). I'm pretty sure laymen have no issue distinguishing between retail and investment banking.
  
  --
  "Politicians and diapers must be changed often, and for the same reason."
10. Re:What purpose does HFT serve? by Opportunist · 2013-10-18 05:45 · Score: 3, Insightful
  
  Just because something is legal doesn't mean it's right. 400 years ago it was legal to burn women as witches. And just 50 years ago it was legal to kick a black guy out of a bus for sitting on the wrong seat.
  And since laws are made by those that have the money, take a wild guess who laws benefit.
  
  --
  We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
11. Re:What purpose does HFT serve? by smaddox · 2013-10-18 05:48 · Score: 3, Informative
  
  Interesting debate, I'll have to finish reading it at some point.
  After reading the opening statements, it seems to me that the pro-HFT guy, Jim Overdahl, is confusing the use of computer automation to reduce transaction costs (which benefits the whole market) with HFT firms that act only as middle men (which benefits only the HFT firms). I didn't realize people could get caught up on such a simple point, but perhaps this is the only way someone could think that HFT is actually a Good Thing.
  Of course computer automation lowers transaction costs, and of course that's a good thing. Adding a minimum hold time, or taxing very short term holds wouldn't eliminate that benefit, though. It would only eliminate the middle men.
12. Re:What purpose does HFT serve? by Opportunist · 2013-10-18 05:49 · Score: 3, Insightful
  
  Erh... that was the original idea of stock companies. You can't afford to build $huge_project, I can't and there's nobody who can. Hell, even we together cannot. But if we can find a few hundred or a few thousand people who're willing to invest a few bucks, we can pull it off. And everyone owns (and controls) as much of the company as his shares say.
  If this ingenious pinnacle of capitalist ideal, a joint ownership of an enterprise dependent on your invested capital, is now considered communism, the system sure as hell needs a lot of repairs!
  
  --
  We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
13. Re:What purpose does HFT serve? by alexander_686 · 2013-10-18 06:59 · Score: 3, Informative
  
  It has been tried. Look up Order Book exchanges. The Paris Bourse was one. The NYSE was a hybrid. They both converted.
  Empirically it produced (mostly) inferior results so everybody ditched it for a quote driven system.
  The problem with a order book exchange is the decreased certainty of trade executions which increased the risk to market makers which causes higher spreads and lower liquidity.
  Now Order Book markets still do survive where liquidity is low or cost is a driving factor. in Dark Pools like ICE. It survives because these trades are more concerned about anonymity and cost then certainty of execution.
14. Re:What purpose does HFT serve? by fnj · 2013-10-18 07:01 · Score: 3, Insightful
  
  What really matters is money, making it as fast as possible
  I love that phrase, "making" money. When you think about it, this kind of activity doesn't "make" money at all. It does not create wealth. It shifts wealth that exists, to feed the bottomless avarice of the parasites who think they are entitled to something for nothing. The only thing that can CREATE wealth - i.e., feed people and house them - is actual useful work that produces products like food and housing.
15. Re:What purpose does HFT serve? by Anonymous Coward · 2013-10-18 07:02 · Score: 3, Insightful
  
  "Arbitrage" is a real and beneficial thing when you have a pack animal and are shelping goods to the nearest village on the other side of a mountain. It is good because it allows goods to be distributed where there is demand more efficiently and over time it helps to make sure the people who produce goods get to sell closer to what customers are willing to pay. This happens because the demand of the traders over time will increase the price at point of production as they compete over sales at the point of consumption. In the classic sense the people who benefited from arbitrage provided an actual service by actually moving goods, or money, to places where there is a distortion in the marketplace and help provide long term stability to the market.
  "Arbitrage" in this application is simply picking pockets. They provide no benefit to the buyers or sellers at all and only ADD instability to the market.
  The only difference between a normal pick pocket and a HFT shop is that instead of taking your whole purse, they take just one copper out of it. However they do it every single dam time you open it.
  They are thieving leeches and they should be outlawed.
  They are not needed for liquidity anyway, liquidity is somewhat overrated as too much can distort the market , and it is already provided by market makers in practice, and by index funds and institutional investors in the current real-world.
Easy solution for all their technical problems. by Anonymous Coward · 2013-10-18 04:35 · Score: 5, Insightful

Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.
1. Re:Easy solution for all their technical problems. by rickb928 · 2013-10-18 04:48 · Score: 3, Insightful
  
  "the buy-sell spread has fallen dramatically "
  Is this good, and for whom?
  
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  deleting the extra space after periods so i can stay relevant, yeah.
2. Re:Easy solution for all their technical problems. by edman007 · 2013-10-18 05:30 · Score: 3, Interesting
  
  How much? As someone who invests for the long term, I really don't see large spreads affecting me. Right now, looking at google, I see a spread of 16 cents on a $1000/share stock. If I invest in that stock, I'd probably consider anything under 1% in gains a wash, so the spread would have to be over $10 to even factor into my decision making. I don't care if the spreads go up 10x, to $1.50 on that stock, it won't affect me, yes I'll lose that extra dollar or so, but I'm trading on double digit gains/losses, if I buy at $700 and sell at $1000 I don't care about that $1.50, it doesn't materially hurt me. All that HFT does it make the stocks react faster to the news, and the cost is that the HFT people get to suck money out of the market for nothing (though make it liquid I suppose), But is that something we really need? I don't need it that liquid for my investments, and the businesses don't either.
  If it was up to me I'd change the stock exchanges to process one trade per account per stock per day, all at 4pm (meaning you got the whole day to enter your trades, speed won't have an effect at all).
Gross receipts tax by Overzeetop · 2013-10-18 04:53 · Score: 4, Interesting

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.

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Is it just my observation, or are there way too many stupid people in the world?
Comment removed by account_deleted · 2013-10-18 05:04 · Score: 4, Insightful

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