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Barbarians At the Gateways

Posted by Soulskill on 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.'"

10 of 321 comments (clear)

  1. Liquidity by Anonymous Coward · · 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 kajsocc · · 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.

  2. What purpose does HFT serve? by Opportunist · · 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 · · 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.

      --
      (-1: Post disagrees with my already-settled worldview) is not a valid mod option.
    2. Re:What purpose does HFT serve? by mythosaz · · 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 · · 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 ShanghaiBill · · 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.

    5. Re:What purpose does HFT serve? by Anonymous Coward · · 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.

    6. Re:What purpose does HFT serve? by Anonymous Coward · · 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.

  3. Easy solution for all their technical problems. by Anonymous Coward · · Score: 5, Insightful

    Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.