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How Microwave Transmission Is Linking Financial Centers At Near-Light Speed
The L.A. Times has a short but compelling article about the state of the art (and coming state of the art) in dedicated networking technology in one of the applications where you'd expect the customers to care most about it: connecting financial trading centers. Milliseconds count, and the traders count milliseconds. From the article, one example:
"[New York-based networking company] Strike, whose ranks include academics as well as former U.S. and Israeli military engineers, hoisted a 6-foot white dish on a tower rising 280 feet above the Nasdaq Stock Market's data center in Carteret, N.J., just outside New York City.
Through a series of microwave towers, the dish beams market data 734 miles to the Chicago Mercantile Exchange's computer warehouse in Aurora, Ill., in 4.13 milliseconds, or about 95% of the theoretical speed of light, according to the company. Fiber-optic cables, which are made up of long strands of glass, carry data at roughly 65% of light speed."
here you'd expect the customers to care most about it:
Yeah, and what customers? Electronic trading supercomputers.
None of this makes a difference to honest trading except to ensure its loss making properties.
Do it yourself, because no one else will do it yourself. [beta blockade 10-17 Feb]
Only if not used to take advantage over said ordinary citizens.
The fact that the traders count milliseconds is proof that they are just scam artists. Parasites, producing nothing of value. High-speed trading is nothing but a mechanism for funneling money to the rich from everyone else.
It looks like another symptom of why China is going to kick our ass. All this effort put into getting crumbs from what other people do instead of doing something tangible.
Ask where all the money to fund this is coming from.
HFT doesn't actually manufacture anything or provide a valuable service. It's purely exploiting the numbers for profit, out-trading slower traders. The profits made in HFT are ultimately at the expense of everyone else on the stockmarket who can't keep up. Which likely includes your pension fund.
People don't like HFT because it's profitable, and they perceive things like "it's stealing money from my pension fund". But it isn't. Your pension fund makes a trade every few weeks. Daily at most. If it's an index tracker, and most of them are, then they rejig the portfolio when an index rebalance happens - the day they decide which successful small players come into the index, and which fallen big players are now out. This happens every three months, six months or annually depending on which index it is. I promise you, your pension fund makes more money from your pension fund than HFT firms make from your pension fund.
HFT firms are generally market makers. These are people who have no particular view on the direction the market is about to move, and will give you a price to buy at, and a price to sell at. If they strike a sweet deal with the exchange, then they are obliged to do both and for a fairly high percentage of the time. If they chose, they can also just put a buy order and a sell order in exactly the same way, but the exchange won't give them the same discount.
Either way, with market making, you buy low and sell high, and try not to hold on to the thing long, since otherwise you end up with a risk that it goes up (if you've sold more than you had, known as shorting) or it goes down (if you've bought more than you've sold, like most people invest).
Therefore, the only way you make money is when people trade with you. You need to buy one and sell one a lot, and then the difference between your buy and sell price, known as the spread, is yours to keep. You therefore need two things: to have the best prices, and be at the front of the queue.
Speed is essential for both of these: if you are fast, you can give a good price, because when things turn against you, you can cancel the orders that would now hurt you. Getting to the front of the queue is obviously speed dependent.
So in practice, you end up competing against the other market makers, since you all only make money when someone trades with you. The pension fund, or whoever, actually trying to buy or sell their holdings in the market gets a much better price for doing so.
It's like in an RPG when merchants give you 50% of your loot's value, but sell it back to you for 200%. It's pretty clear where they are making their money, but you're only out of pocket if you keep buying and selling. If your wizard sells off the Stupidly Heavy Sword of Smiting because he doesn't want it, then he still pockets the gold. Likewise, when he buys the Nifty Cloak of Resist Goddam Everything, he gets the benefit from it, no matter what else the merchant buys or sells. If you sit there and keep buying and selling the same wooden bowl from the guy, then yeah, you can get rid of all your money fast. Pro tip: don't do that in the stock market either.
Obviously it's better for you if instead of the mark up being buy @ 50% / sell @ 200%, it becomes 90% / 115% (or whatever, doesn't have to be absolutely symmetrical). The HFT market makers are the dudes who let you get the better prices in the market when you / your pension buy or sell.