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Stock Market Manipulation By Millisecond Trading

kdawson posted about 5 years ago | from the other-people's-money dept.

The Almighty Buck 624

cfa22 writes "Nice piece in the NY Times today on ultra-fast trading on the NYSE and other markets. The 'algos' that make autonomous trading decisions have to be fast, but I wonder: Is network speed ever a bottleneck? Can anyone with inside experience with millisecond trading provide some details for the curious among us regarding hardware architectures and networking used for such trading systems?" According to the article, high-frequency traders generated about $21 billion in profits last year.

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624 comments

first (-1, Offtopic)

Anonymous Coward | about 5 years ago | (#28806957)

yay!

Profits, but for whom? (3, Insightful)

BadAnalogyGuy (945258) | about 5 years ago | (#28806975)

Traders make a profit on each trade. But the profit is always to the broker.

Ultra fast trading is an interesting idea and done right it can lead to successful short term returns, but if you take a Ferrari around a hairpin at 120mph, you're still going to hit the wall and die.

Re:Profits, but for whom? (5, Interesting)

Mr. Underbridge (666784) | about 5 years ago | (#28807097)

Ultra fast trading is an interesting idea and done right it can lead to successful short term returns, but if you take a Ferrari around a hairpin at 120mph, you're still going to hit the wall and die.

Here's what happens when that particular Ferrari hits the wall:

http://tech.slashdot.org/tech/08/09/10/203233.shtml

Re:Profits, but for whom? (0)

Anonymous Coward | about 5 years ago | (#28807163)

ironically, slashdot news posts and comments don't show the year...?!

Re:Profits, but for whom? (1)

AvitarX (172628) | about 5 years ago | (#28807265)

looks like 10/09/08 10:32:33 pm to me (probably international time?)

but what do I know.

Re:Profits, but for whom? (0)

Anonymous Coward | about 5 years ago | (#28807493)

that's if you look at the URL. where do you see it on the actual post? What if [insert webcrawler name] parses page contents instead of page urls?

Re:Profits, but for whom? (5, Interesting)

tverbeek (457094) | about 5 years ago | (#28807129)

Can someone explain to me the benefit to society of this kind of activity? I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved, investing capital where it will produce goods/services/jobs, and so on. So despite being a social lefty, I'm not anti-capitalism or anti-stock-market; it has risks and flaws but it works. But how does this kind of stock trading benefit anyone other than the traders themselves?

Re:Profits, but for whom? (5, Informative)

maxume (22995) | about 5 years ago | (#28807197)

In theory it adds liquidity to the market and reduces trading costs for other players.

Also, many of the successful trades will be based on having better information than the market price (over time, it would be very difficult to have much success by being lucky, especially with multiple automatic systems active), the execution of those trades makes the market price more accurate.

Re:Profits, but for whom? (1)

alexmin (938677) | about 5 years ago | (#28807359)

Excellent explanation. Only can add that someone's "investments" ultimately has to be converted to cash to fund a living. "Liquidity" means ability to do that when someone needs it with minimal costs.

Re:Profits, but for whom? (4, Insightful)

quantumplacet (1195335) | about 5 years ago | (#28807567)

In this case, that is not quite what 'liquidity' means. When you discuss 'the liquidity of assets' you're generally referring to how easily and cost effectively those assets can be converted into cash or other, spendable assets. However, liquidity of a stock/bond/credit in this context is referring to how much that market is actively being traded. A liquid market is constantly moving, an non liquid market is stagnant. Theoretically, the more liquid a market is, the closer it's price is to its actual market value. This is related to the other kind of liquidity, as if you have an investment in a stagnant market, it would be very difficult to sell and turn into cash, but in a financial market context, that's not really what they're referring to.

Re:Profits, but for whom? (1)

umghhh (965931) | about 5 years ago | (#28807507)

but the only ones that really want it more accurate are these milisecs boys so you still failed to answer the question accurately, me thinks.

Re:Profits, but for whom? (1, Insightful)

Anonymous Coward | about 5 years ago | (#28807271)

By eliminating inefficiency is the standard rhetoric.
Exploiting arbitrage opportunities by definition causes them to disappear.

Re:Profits, but for whom? (2, Insightful)

Culture20 (968837) | about 5 years ago | (#28807277)

But how does this kind of stock trading benefit anyone other than the traders themselves?

It doesn't other than inflating/deflating the perceived value of a company. It's a method to speed up the "productive citizens"->"traders/middlemen" transfer.

It doesn't (0)

Anonymous Coward | about 5 years ago | (#28807427)

That fast trading going on now is just them sucking out more stimulus cash from other places that got stimulus cash. Gaming the system, legal and obscured front running. Leeches.

Re:Profits, but for whom? (1)

vertinox (846076) | about 5 years ago | (#28807469)

Can someone explain to me the benefit to society of this kind of activity?

Inflation sink, market efficiency, and liquidity.

Although it seems like a meta-game to most, the ability to do things like this makes pricing of shares more efficient to the actual value of the market (increasing the price of undervalued stocks and decreasing the price of overvalued stocks) and making money flow rather than stay stagnant.

It also pulls a lot of money out of the goods and services world making a natural force against inflation.

Re:Profits, but for whom? (3, Interesting)

siloko (1133863) | about 5 years ago | (#28807591)

I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved.

I realise I am likely to be charged with trolling [again!] but the stock market now seems to reflect the quality and quantity of ype not products and services. The market capitalisation of dot com companies in particular (AOL is wonderful example) is ridiculous when stacked against their profitability. Nuts and Bolts companies are dull, don't generate headlines and thus don't post great dividends for their shareholders as no-one even cares if they are making a regular profit. Stock markets seem now to be so detached from the reality of the profitability/financial viability of a company that watching the rise of shares to ascertain corporate health is foolish at best.

I wonder if theses 'algos' have some built in A.I. which parses the days headlines to see if sufficient vacuous hype has been generated to make an investment worthwhile . . .

Re:Profits, but for whom? (3, Interesting)

vertinox (846076) | about 5 years ago | (#28807333)

Traders make a profit on each trade. But the profit is always to the broker.

Depends on who your broker is and what kind of account you have with them.

A true blue day trader is going to have a setup for Direct Access Trading [wikipedia.org] which isn't what you see on TV for those $9 dollar trades for the average Joe.

It requires you to have more than say $20,000 in the account and you must make a lot daily trades to be eligible, but the transaction fees are very low per trade so you won't be paying as much to your broker (like pennies on the dollar sometimes if volume is high enough).

Re:Profits, but for whom? (0)

Anonymous Coward | about 5 years ago | (#28807341)

The government?

When you buy and sell the same bicycle 1000 times per second, the government is entitled to x% of each transaction, so you better make sure that you're selling (x+0.01)% higher than you're buying, which gives you 0.01% profit 1000 times per second. Now consider that the government is making x% in sales tax 1000 times per second!

Re:Profits, but for whom? (1)

Ascagnel (826800) | about 5 years ago | (#28807435)

The government gets taxes based on capital gains (i.e.: your net profit/loss). Stock sales themselves are not considered taxable in the US.

All the traders with the highest ranks (0)

Anonymous Coward | about 5 years ago | (#28806979)

Are using special trader's routers from D-Link. Helps you get those NYSE unlocks so much faster. Worth every debased dollar.

Primarily Fiber Channel Networking (3, Informative)

Red4man (1347635) | about 5 years ago | (#28806995)

Fiber Channel: It's gigabit speed, and very reliable once installed. The only thing to worry about is to make sure you're not bending the cables too far when you're installing the rack mounted gear - if you do - SNAP! - and you've destroyed the cable.

MOD PARENT UP, +1 INFORMATIVE! (0)

Anonymous Coward | about 5 years ago | (#28807161)

I'm looking at an HP Rack with Fiber channel networking and a hardware balancer right now.

Re:Primarily Fiber Channel Networking (1)

alexmin (938677) | about 5 years ago | (#28807253)

Internal colo networking is mostly copper. Fiber-copper converters are used only for external telco links and only when absolutely needed. Why would you have extra piece of equipment sitting in the rack and degrading your reliablity?

Re:Primarily Fiber Channel Networking (1, Interesting)

Anonymous Coward | about 5 years ago | (#28807551)

Rubbish. These networks tend towards Infiniband. Fibrechannel is only used for storage, and is too slow for use in real time trading systems.

This is old news... (2, Funny)

larwe (858929) | about 5 years ago | (#28807015)

Latency issues have been an important factor for a long time. Here's an example article about some of the details:

Re:This is old news... (1)

gardyloo (512791) | about 5 years ago | (#28807257)

Hm. AOL?

Re:This is old news... (1)

larwe (858929) | about 5 years ago | (#28807339)

I plead mental incapacity due to lack of sleep.

Great future (5, Funny)

muyla (1429487) | about 5 years ago | (#28807027)

In one or two decades we might be able to let all the stock trading to be done by the machines while we focus on doing the non-specialized work ourselfs! Ow wait... wasn't it supposed to go the other way around?

Re:Great future (5, Insightful)

Nursie (632944) | about 5 years ago | (#28807191)

Lol.

I often do wonder how we ended up here. Most of the wealth of the world is held not by its citizens, but by corporations. Corporations are owned by funds, which are owned by investors which... and by the time you drill through the obfuscation there seems to be nobody that actually accounts for most of the wealth created by the people that actually produce stuff.

And then you have the wall street leeches who juggle numbers around and suck millions out of... what exactly? The world is not richer for them in any material sense.

All the while I'm wondering why the day I can retire seems further and further away despite massive advances in technology. Shouldn't we all be creatures of (comparative) leisure by now?

Re:Great future (1)

maxume (22995) | about 5 years ago | (#28807353)

So who owns the corporations?

And really, most of the wealth of the world is production that is consumed. Look at it this way, at his wealthiest, Bill Gates was worth about $100 billion (I think he hit about $80 billion nominally when Microsoft was at its peak and I am just fudging for inflation, not calculating). The U.S. economy produces about $14 trillion a year, so over a total of 25 years, the richest man ever to live managed to capture about 2.6 days of the current annual production of the United States (and he is back down to having about 25 hours).

Re:Great future (2, Interesting)

Nursie (632944) | about 5 years ago | (#28807395)

The corporations are owned by investment funds which in invest money for investors. Everyone from you or me and out pensions up to the big fish with their hundreds of millions.

I'm not complaining that the evil corporations are hoarding the money away from the common man (man), I'm just wondering why the average Joe has to work as hard as ever and still has a struggle to provide for his (ever retreating) retirement, when traders trade in more than enough for everyone.

I guess that makes me a socialist or something.

Re:Great future (5, Informative)

maxume (22995) | about 5 years ago | (#28807559)

I don't follow "when traders trade in more than enough for everyone.".

And really, people worked far harder 150 years ago than they work today (farming using animal power is not easy), and I'm pretty sure the common man in the U.S. worked far harder 50 years ago than he does today (working in a factory is 'harder' work than sitting at a computer). People complain that they just can't get ahead, but people drive newer, bigger cars and live in bigger houses and eat better food and buy more crap and on and on, so just looking at the fact that families seemed to have switched from 1 income to 2 is not sufficient.

Re:Great future (1)

NewbieProgrammerMan (558327) | about 5 years ago | (#28807529)

...so over a total of 25 years, the richest man ever to live managed to capture about 2.6 days of the current annual production of the United States (and he is back down to having about 25 hours).

Assuming there's 153.1 million people [google.com] "producing" in the US, and that the average person works for 60 years, that 2.6 days of GDP comes out to about 18,000 working lifetimes of average production. That still seems like a lot to me.

Re:Great future (5, Interesting)

nelsonal (549144) | about 5 years ago | (#28807453)

Pensions and 401(k) plans largely. There's a huge amount of wealth in those. Ironically, the only pensions that act like they give a damn about what they own are the union plans.

You actually could have a life of comparative leisure relative to the past, but humanity spends huge amounts of time competing with status displays which have become vastly more important to personal happiness in the more "relaxed" world. If you're willing to live a 1950s lifestyle you should be able to have far more leisure time than the 1950s person. Remember though that you'll never leave your home country for travel, live in ~300 sq/person house, share a household immediately after college, and you would probably only own 3-4 suits of clothes.

ZeroHedge has been hitting on this... (1)

tcopeland (32225) | about 5 years ago | (#28807035)

...for a while. A post from several days ago - The Day That Was - HFT's Superdominance [zerohedge.com] . Extra points to them for the Fight Club motif!

Free Market working A-OK (-1, Offtopic)

Anonymous Coward | about 5 years ago | (#28807045)

This is how the free market works and you are certainly free to set up a competing system. Get over your jealousy already people!

Re:Free Market working A-OK (4, Insightful)

wlj (204164) | about 5 years ago | (#28807121)

My reading of the article brought out the point that, for a few extra bucks, you can actually go to the head of the line - giving the window of opportunity to perform the other actions described. Interesting definition of "free market" ...

Re:Free Market working A-OK (0)

Anonymous Coward | about 5 years ago | (#28807195)

You're free to purchase that service. no?

Re:Free Market working A-OK (0)

Anonymous Coward | about 5 years ago | (#28807343)

The really unfair bits are:
* Access to market data is prohibitively expensive
* The fees retail investors are hit with which effectively hinders those from stepping in to and out of positions frequently (to take home small profits or keep losses small)

Re:Free Market working A-OK (4, Insightful)

ShadowRangerRIT (1301549) | about 5 years ago | (#28807193)

The problem is the start-up cost. Buying the necessary hardware, obtaining the required data sources, developing the necessary analytical formulas and coding them efficiently costs a *lot* of money. So it's the free market of people who already have a lot of money and time, or simply an enormous amount of money.

I'm not entirely against it in some cases; well implemented it can smooth out market fluctuations and value securities more accurately. But it still makes me squeamish: It's yet another mechanism by which the rich get richer, and the poor get left behind. Every trade a "normal" person makes will end up costing a small amount more, and the difference goes into the pocket of the HF funds. It feels very much like the "shave the fractional cents off interest calculations" scam: No one suffers individually suffer, but it still feels wrong.

Re:Free Market working A-OK (1)

Freetardo Jones (1574733) | about 5 years ago | (#28807391)

The problem is the start-up cost. Buying the necessary hardware, obtaining the required data sources, developing the necessary analytical formulas and coding them efficiently costs a *lot* of money. So it's the free market of people who already have a lot of money and time, or simply an enormous amount of money.

Because the people currently providing these services didn't have to pay all the infrastructure and coding costs when they joined? Since when did "free market" mean you didn't have to spend money to join in?

Re:Free Market working A-OK (1)

smartr (1035324) | about 5 years ago | (#28807201)

No kidding, just look at all those stock exchanges popping up everywhere and competing, unregulated by the government. The NYSE and NASDAQ are so awesome that no one would ever want to compete.

Mod me down mother fuckers!! (-1, Troll)

Anonymous Coward | about 5 years ago | (#28807047)

Niggers

I can just see it right now (3, Funny)

Anonymous Coward | about 5 years ago | (#28807061)

Stock Trader Just got a Headshot - $3000

SEC Official: I see you over there...

Stock Trader: I'm not hacking, I'm just lagging!

SEC Official: Turn them off, or I'm banning!

Human reaction bottleneck (1, Interesting)

Drakkenmensch (1255800) | about 5 years ago | (#28807065)

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

Re:Human reaction bottleneck (2, Informative)

Bender0x7D1 (536254) | about 5 years ago | (#28807217)

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

That assumes there is still a human in the loop and not a computer doing trades autonomously. Within certain bounds, of course. But still autonomously.

Re:Human reaction bottleneck (4, Informative)

ShadowRangerRIT (1301549) | about 5 years ago | (#28807219)

Humans don't make the purchases or sales. The algorithms trade on their own, all the humans do is define the mechanism to evaluate trades and set limits (to ensure a bug or an unusual market movement doesn't get out of control).

Re:Human reaction bottleneck (2, Insightful)

Drakkenmensch (1255800) | about 5 years ago | (#28807267)

The algorithms trade on their own, all the humans do is define the mechanism to evaluate trades and set limits

Human arbitrary decisions applied blindly by a machine thousands of times per seconds. That sounds like a real winner to me.

Re:Human reaction bottleneck (3, Insightful)

ShadowRangerRIT (1301549) | about 5 years ago | (#28807437)

Hey, as long as the limits are reasonable, there's nothing intrinsically wrong with it. Humans are pretty bad at picking stocks; all those rules our brains use to simplify decision making tend to muck up our ability to evaluate them accurately. The computers can be trained to evaluate based solely on those factors that are actually useful, and do it faster and more effectively than the human could. It sounds horrible the way you phrase it, but so many other applications we use computers for; we don't like the idea of machines supplanting humans in most fields.

Re:Human reaction bottleneck (1)

Drakkenmensch (1255800) | about 5 years ago | (#28807531)

Hey, as long as the limits are reasonable, there's nothing intrinsically wrong with it.

Yeah, that's true, I guess that's why our economy is going so goo- oh wait.

Re:Human reaction bottleneck (1)

rpopescu (1563191) | about 5 years ago | (#28807239)

Nope, that's not how it works, there's no such button in this type of trading. The processing/reaction times of the automated trading systems are actually measured in microseconds. Yes, I/O is the bottleneck.

Re:Human reaction bottleneck (0)

Anonymous Coward | about 5 years ago | (#28807281)

Not that any of those systems require manual confirmation...

You agree on certain limits beforehand and after that it is all in the hands of CPU.

Re:Human reaction bottleneck (0)

Anonymous Coward | about 5 years ago | (#28807315)

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

Most trade decisions are fully automated with no human interference at all.
May the fastest guy win ;-)

Re:Human reaction bottleneck (1)

HashDefine (590370) | about 5 years ago | (#28807433)

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

Quite a few (more than most people imagine anyway) Algo trading systems run without any humans needing to confirm trades.

Humans do monitor what the systems are doing but they do not confirm every order, given the volume that would be impossible, too slow and/or too expensive.

The latency matters enough that people have been known to put the trading systems physically as close to the order processing back end as they can often collocating at an investment bank as opposed to their own data centers.

Re:Human reaction bottleneck (1)

Freetardo Jones (1574733) | about 5 years ago | (#28807443)

It seems to me like any potential for exploiting millisecond delays in transaction transmission will be consumed and defeated by the time it takes a human operator to interpret the information and hit the "confirm purchase/sale" button.

Did you even read the summary? Let me quote the relevant section:

The 'algos' that make autonomous trading decisions

Re:Human reaction bottleneck (1)

Chris Mattern (191822) | about 5 years ago | (#28807491)

Very true. Which is why there's no human confirmation in these systems. If that doesn't make you afraid, it should.

Re:Human reaction bottleneck (1)

confused one (671304) | about 5 years ago | (#28807553)

There's no human in the loop after they've set up the trading algorithm.

1588v2 aka Precision Time Protocol Version 2 (4, Insightful)

statusbar (314703) | about 5 years ago | (#28807069)

I believe that precision millisecond stock trading globally is the real reason behind the IEEE 1588v2 precision time protocol. The cisco 9000 enterprise switch supports it. Support has been lacking in smaller switches. The only other group using PTPv2 is the cell phone industry.

The interesting part of PTPv2 for me is that it is used in the 802.1AS protocol ( http://www.ieee802.org/1/pages/802.1as.html [ieee802.org] ) which is one of the foundations of Audio Video Bridging (AVB) http://www.ieee802.org/1/pages/avbridges.html [ieee802.org] - Which allows for real time low latency low jitter media streams transported via ethernet with guaranteed bandwidth.

Just yesterday I was joking with friends: Forget about stealing the rounded pennies from bank accounts, criminals could re-program the PTPv2 implementation in switches to steal milliseconds of time during trading!

Anyways, back on the original question, no, network speed is not so crucial once all of your packets are properly timestamped.

--jeffk++
 

Re:1588v2 aka Precision Time Protocol Version 2 (5, Interesting)

TubeSteak (669689) | about 5 years ago | (#28807399)

Anyways, back on the original question, no, network speed is not so crucial once all of your packets are properly timestamped.

RTFA:
One second after the market opened, shares of Broadcom started changing hands at $26.20.
...
While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
...
Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors' upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

On the one hand, you can call this 'perfect price discovery'
OTOH, that specific set of behaviors fundamentally breaks the traditional way that the imperfect markets have worked.
And just as importantly, it represents an unfair trading advantage that you or I will never have.
Allowing this behavior doesn't further market activities, it just allows a few players to accumulate wealth at everyone's expense.
Seems to me that the solution is to close the loophole that allows this to happen.

meh (1)

Em Emalb (452530) | about 5 years ago | (#28807081)

These computers are only as good as the "algos" (God, what a lame term) that are programmed in them. Screw up, and billions potentially are lost.

They're doing the same as anyone else can, just faster and more reliant on technology to do it. They're gonna screw up before long...

Re:meh (1)

gander666 (723553) | about 5 years ago | (#28807151)

Actually, if the programs are well written, you will never lose money in this. You make it on the way up, you make it on the way down, and regardless of how the market moves, you always get your slice.

Hardly seems fair, but the little guys have no hope.

Re:meh (3, Interesting)

Em Emalb (452530) | about 5 years ago | (#28807245)

No, the little guys still have hope, they can still make money, just maybe not quite as much as these "super-fast" traders.

(Disclaimer: I work for a financial firm. This isn't really news, as the market for these types of trades has been mature for a while now)

LOL, and now I get the "Slow down Cowboy" message. It appears slashdot does not believe in micro-second posting. ;-)

Re:meh (1)

Permutation Citizen (1306083) | about 5 years ago | (#28807351)

They can be defeated by another trading software that start buying to send to HFT a wrong "buy" message, then sell.

Re:meh (1)

alexmin (938677) | about 5 years ago | (#28807383)

Ha-ha, tell that to Citadel guys that got blown up big last year! Why do you think Misha Malyshev (head of Citadel hf trading desk and of Aleynikov assosiation) left Griffin in Feb?

winner-take-all competition (5, Interesting)

WipeLeftShakeRight (1565507) | about 5 years ago | (#28807093)

I interviewed at a millisecond (market-making) trading firm in Chicago. They claimed that when a hedge fund, etc. would buy or sell a stock, that one large purchase or sale would typically signal another. Whichever firm could get their quote up the fastest would make the buy or sale, and it's a winner-take-all system. The first market-maker to adjust their price would benefit. Thus, server speed is THE essential bottleneck. Needless to say, they keep the location of their server a secret.

Performance is a driving issue (5, Interesting)

axafg00b (398439) | about 5 years ago | (#28807123)

A firm I worked with recently tore down an arbitrage network (they were getting out of the business as it was not core) which comprised of a great deal of Layer 2 dark fiber between sites in NYC and an external data center in NJ, Force 10 fabric switches with multiple paths to server clusters, and a great many Sun X-series servers running Linux. This arbitrage network bypassed the standard corporate (i.e. Cisco-based) network as they wanted exclusivity, higher bandwidth and as much speed as possible. Still, there were issues and the whole environment was scrapped since the actual returns did not match the expectations or cover the costs.

When I looked over the shoulders of the designers (they didn't want too much support from the regular network engineering team) they were concerned with raw performance and not as much with security or other daily operational issues. I would characterize it as the difference between, say, a NASCAR Sprint Cup car and your regular transportation. The former is purpose-built solely for performance while the other has to contend with safety requirements, daily functionality, and a lower common denominator for use.

Re:Performance is a driving issue (1, Funny)

Anonymous Coward | about 5 years ago | (#28807289)

Good job working in a car analogy at the end there.

Re:Performance is a driving issue (2, Informative)

mikael (484) | about 5 years ago | (#28807497)

Most of the safety innovations for private cars came from the racing car industry - roll bar cages, seat belts, crumple zones, safety glass. Roll bar cages and crumple zones and safety glass have been into train carriages as well.

Allston Trading Has Spoken At My University (5, Interesting)

Anonymous Coward | about 5 years ago | (#28807133)

Allston Trading occasionally speaks at my university, and they've said that network bandwidth can be a big bottleneck. They needed to install servers across the street from the NYSE to attain the edge they needed.

As far as who the profits go to, ALlston (and I suspect many similar organizations) keeps most of their profits internal, and exercise big profit-sharing programs for their employees. It's actually quite an interesting idea, as this group of almost entirely Computer Scientists are using their expertise to make some good money as a cell in an atmosphere dominated mostly by business-types.

Re:Allston Trading Has Spoken At My University (1)

alexmin (938677) | about 5 years ago | (#28807303)

AFAIK, Allston Trading (and most of big prop shops like Citadel etc.) has a profit split with trading groups which are quite independent in regards to strategy, tech or personnel.

Some info (5, Interesting)

Haffner (1349071) | about 5 years ago | (#28807165)

As someone who works with people who do this, I can tell you they spend a lot of money on very powerful machines, and then try to place said machines within walking distance of the exchange's computers. I have been told that running a server at the office is too slow, even if its in the same city. Also, millisecond is the wrong word. Their trading is measured more closely in microseconds.

Uh, no (1)

ufamsm (928247) | about 5 years ago | (#28807171)

I'm involved in the industry, and can say that anyone who gave up pretty much anything regarding those types of systems would find themselves no longer employed by any financial services firms. Ever again. As the article indicates, it is an arms race, which is why the potential code leak was such a big deal. The kind of advantage gained by knowing the algorithm of a competing firm is potentially massive, even if it came down to something as simple as fixing a single loop for a smaller set of average recursions. In short, these are black box technologies. Anybody who really talked about them should get used to removing their current position from their resume, if not sued to oblivion over violating terms of an NDA.

Re:Uh, no (1)

maxume (22995) | about 5 years ago | (#28807381)

I'm pretty sure the code leak was a big deal because the fact that he wasn't caught right away left open the possibility that he had done something else that was not noticed (like introduced a logic bomb).

I would guess that they either backed out and threw away every single thing he touched, or alternatively, vetted it all.

FAZ and FAS funds (2, Interesting)

vertinox (846076) | about 5 years ago | (#28807175)

This has been a common topic on the stocks news groups about FAZ [google.com] and FAS [google.com] using different methods because of inefficiency between the two funds.

They are support to inverses of each other (short and long) of the finacial markets with leverage, but a few people have noticed that during the first minute of trading they aren't exactly the same.

The basis of the what people are doing is complicated and usually involves buying both shares and dumping one in the first minute and then selling the other shortly thereafter.

But there are other methods people have talked about but I can't seem to find the newsgroups since they were buried in spam a month or so ago.

not first (5, Funny)

Permutation Citizen (1306083) | about 5 years ago | (#28807203)

I suppose that's the same guys that are always getting the "first post" on /.

A profitable subset of "algorithmic trading" (5, Informative)

GlobalEcho (26240) | about 5 years ago | (#28807207)

I work in the finance industry, and know a few things about this business. It can be very profitable indeed. Since the HF trades are typically finished at the end of each day (or even minute), they are not required to hold much cash (capital) to support their positions. Thus the business is unusual in the finance world for making a profit on, essentially, zero capital. Of course, it costs a lot of money to stay in the arms race.

The article hints at two kinds of HF strategies, and they really are distinct. First, there are the "rebate" strategies that collect those credits for providing markets. Then, there are the "predatory" strategies that try to find the price points of buyers and sellers as described. Other HF strategies include pairs trades (Exxon goes up so RIG will soon), inter-exchange arbitrage where a stock is traded on multiple exchanges, and index arbitrage such as trading the elements of the S&P 500 against the index futures (which has been around almost forever).

Other algorithmic trading includes strategies meant to take on positions slowly (or quickly) and efficiently. A famous old category are the Volume Weighted Average Price (VWAP) strategies that try to trade a little bit at a time throughout the day, so that the average trade price is close to the day's average. Other algos try to take advantage of mean reversion or trends during the day.

There is huge demand for technical people in this industry (I probably get one headhunter call every two weeks), almost all of it in NYC or Chicago. There's demand for network engineers, statisticians, programmers, and traders, and high pay for quality. Surprisingly few programmers these days are really acceptable to the business, because the code has to be so fast and efficient, and almost no one studies that any more.

The short answer (4, Informative)

sjvn (11568) | about 5 years ago | (#28807209)

Most exchanges aim for that kind of speed now, but fail to make it. Some of them, like the London Stock Exchange, http://blogs.computerworld.com/london_stock_exchange_to_abandon_failed_windows_platform [computerworld.com] , which made the idiotic mistake of relying on Windows Server and SQL Server, don't even come close to delivering that kind of performance.

For those that come closest, the servers tend to be transaction-optimized RHEL (Red Hat Enterprise Linux) and Solaris. The networks are fiber optic-based. While they may connect to the Internet, the core systems, like those provided by AboveNet, are usually private 10GBe networks. In short, to really take advantage of this kind of high-speed trading you're not going to be doing this from your basement. You need to have a trading station either co-located at the market, or just down the street on a high-speed network no more than a link or two from the exchange's servers.

And, yes, network speed does matter here. So does server, storage and DBMS access speed.

Needless to say, none of the exchanges are exactly forthcoming about what their particular magic technology formula is since being able to deliver high-speed trading consistently has become an important sales point. I know many traders on Wall St. and the City in London who will move from one Exchange to another based purely on their ability to deliver faster trades. For this group, what's being traded is besides the point. It's all about keeping an edge in trading speed over their competitors.

Steven

Speed is important (4, Informative)

LearningHard (612455) | about 5 years ago | (#28807263)

To a previous commenter. The companies doing high frequency trading "are" the brokers. They aren't paying any brokerage fees because they have direct access to the market. Additionally speed is important enough that your computers need to be at least in the same physical vicinity as the trading computers. Literally every millisecond makes a difference. One of the things explained in the article is because the computers are so fast they can issue and cancel an order before it gets fulfilled. So with the Intel example: Notice there is a large buying trend in Broadcom Issue at x and see if there is a match. When a match is found immediately cancel. Issue at x+1 and see if there is a match. When a match is found immediately cancel. Repeat until a match isn't found. Place a huge sell order at the final number a match was found. PROFIT Basically the company made a .4% profit in a few seconds on 1.8 million by doing nothing but taking advantage of proximity to the market. This runs against several of the ideas around how an exchange is supposed to work. By the way... if I remember the match correctly that small .4% profit? It becomes huge when you consider this is done every second of every day. All that money those big firms are sucking up are coming from the small investor. The question is what is there to do about it? It will kill any small time daytrader. Someone like me who buys and holds will be alright but man forget trying to trade minute by minute based on technicals.

Re:Speed is important (1)

Permutation Citizen (1306083) | about 5 years ago | (#28807517)

Well, if it force all daytraders out of the market, so they have to find a real productive job, then high frequency trading is useful and deserves the $21.10^9 it sucks each years.

An abuse of the free market system. (5, Insightful)

Whatsisname (891214) | about 5 years ago | (#28807297)

This kind of activity is an abuse of the free stock market system.

This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.

People should look down on this kind of business and method of trading.

Re:An abuse of the free market system. (0)

Anonymous Coward | about 5 years ago | (#28807409)

This kind of activity is an abuse of the free stock market system.

Why should this be considered an abuse? This seems to be precisely how free market works. Someone wants to buy/sell a security. Both sides look for the best price. In an auction environment such as this, the person with the quickest response generally can win. This seems to be the type of innovation that drives free markets. If you don't like it, figure out how to do it better than the competition.

Re:An abuse of the free market system. (1, Insightful)

Anonymous Coward | about 5 years ago | (#28807413)

This kind of activity is an abuse of the free stock market system.

This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.

People should look down on this kind of business and method of trading.

That's like saying that Lowes lost money because I bought my bathtub at Home Depot. Just because you wanted the stock at a lower price doesn't guarantee you that price.

false - this is good (0)

Anonymous Coward | about 5 years ago | (#28807499)

Market is not zero sum game.
Winners outnumber losers in long run.
This is basically arbitrage.
Whiners call it "speculation" but the signals they create correct the market in a healthy way.

Re:An abuse of the free market system. (4, Insightful)

Will Fisher (731585) | about 5 years ago | (#28807533)

You're wrong.

High frequency trading means that more trades happen in general. This extra competition to fill orders drives down the difference between the buy and sell prices and greatly reduces arbitrage situations (ie, the difference in price between the same stock listed on different exchanges and possibly in different currencies).

So, if you buy or sell a something, you're giving less money to the market-makers and you're getting a more "correct" price. It levels the playing field.

And it's true that arbitrage and hifi trading are a zero-sum game. That's why it's an arms-race at this point.

Re:An abuse of the free market system. (0)

Anonymous Coward | about 5 years ago | (#28807581)

If you sell me a widget for $1 and I can turn around and sell it to someone else for $2.
Explain to me who lost the $1 that I gained?

Re:An abuse of the free market system. (0)

Anonymous Coward | about 5 years ago | (#28807587)

This kind of activity is an abuse of the free stock market system.

This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.

People should look down on this kind of business and method of trading.

no - this is just a finer point on the continuoum of speed. It's happened in the 1800's when they used human relay or carrier pigon to speed quote/order info or even in the 1970's when Richies got more talented clerks to arb gold/silver prices between london and us.

the benefit to society is market discovery happens quicker or markets become efficient quicker.

if your trading your 401k - your volatility horizon is not micro seconds, it's actually month or years.

is that you obama ?

Witch hunt (1)

Arthur B. (806360) | about 5 years ago | (#28807299)

High frequency trading, millisecond holding period mean that traders are able to bring more liquidity to the market. A floor on holding periods will increase bid ask spreads as limit orders will become riskier and increase volatility. In this story, Broadcom shareholders were able to sell their stocks for a higher price

Will a 1-min. min. hold make that much difference? (1)

davidwr (791652) | about 5 years ago | (#28807419)

If holding something for a minute is that risky, you shouldn't be buying it in the first place.

Re:Witch hunt (1)

jeffb (2.718) (1189693) | about 5 years ago | (#28807503)

High frequency trading, millisecond holding period mean that traders are able to bring more liquidity to the market. A floor on holding periods will increase bid ask spreads as limit orders will become riskier and increase volatility. In this story, Broadcom shareholders were able to sell their stocks for a higher price

You're absolutely right. Adding more layers of participants, each taking a cut of the profits, is better for everybody. That's why Craigslist will never amount to anything.

Doubtful (-1, Troll)

mr.nicholas (219881) | about 5 years ago | (#28807331)

I seriously doubt anyone who is knowledgeable of the specifics can say anything of value.

I know that I am, and that I will not.

Almost Front Running... (2, Insightful)

nweaver (113078) | about 5 years ago | (#28807355)

Front Running [wikipedia.org] is when the broker or market maker (eg, Nasdaq) does such behavior.

Although the high frequency trading is slightly different, it is almost electronic front-running, especially with the ability to PULL the orders unfufiled after a few milliseconds.

Re:Almost Front Running... (0)

Anonymous Coward | about 5 years ago | (#28807457)

It is front running. It's just not illegal yet.

Cancellation fees (2, Interesting)

davidwr (791652) | about 5 years ago | (#28807471)

Canceling an order should be discouraged, in the form of a fee small enough to be merely annoying to someone who occasionally cancels an order, but costly enough to discourage routine cancellations.

First Person Shooter (1)

forand (530402) | about 5 years ago | (#28807379)

Ever played a first person shooter with someone who was running on the server? Even if you lag was short they had a distinct advantage. Seems like these traders are doing the same thing.

Bogus artilce by clueless arts graduate (5, Informative)

DCFC (933633) | about 5 years ago | (#28807387)

This is an outstandingly bogus article, what happens when arts graduates attempt to understand anything except celebrity gossip.

>It is the hot new thing on Wall Street,
The first algotrading I encountered was in the early 1990s at Deutsche, and they senior guys there told me of some of the mid80s stuff they'd done.
Not new.

>a way for a handful of traders to master the stock market,
Although algotrading is not exactly mass market, it is about as exclusive an activity as getting drunk.

>peek at investorsâ(TM) orders
That's not algotrading.

>and, critics say, even subtly manipulate share prices.
A major topic in algotrading is actually market impact modelling, ie working out how to make prices move less when they trade.

>Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency >trading is one answer.
Actually they're working out how to employ these guys since they've often been shafted by the GS bonus scheme.

>software that a federal prosecutor said could âoemanipulate markets in unfair waysâ â" it only added to the mystery.
He was fed this line by GS as part of a dispute over an algotrader's pay. There is no suggestion that GS was being "unfair", just addressing the issues caused by GS having an inferior tech infrastructure for AT than may competitors.

>"This is where all the money is getting made,â said William H. Donaldson".
I'd love to see the original quote before editing. Bet it was a lot less sexy.

>For most of Wall Streetâ(TM)s history, stock trading was fairly straightforward:
For an arts graduate the writer is terribly ignorant of history, as well as trading.
For instance is he not aware of how the Kennedy family got rich as part of causing the crash of 1929 ?

>Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. âoeMarkets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.â
It's more complex than that. Some ATs are consumers of liquidity, others provide it, and there exist models that imply that heavy AT activity drives liquidity away.

>Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive,
164% is a surprisingly "precise" figure, which PR bunny fed that to him ? Wonder why the PR wouldn't give more ?

>"The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders."
That's really quite amazingly precise. So precise that I believe not a word of it.
Edit/Delete Message

To get ahead you gotta cheat (0)

Anonymous Coward | about 5 years ago | (#28807401)

Why does it seem like the economy encourages this gaming of the system? There's millisecond and insider trading, IP lawsuits, lobbying, corporations shielding the boardroom, etc... Even as an employee, to get a promotion, you're better off bullshitting your way up the ladder than working hard.

Of course it matters. (1)

chaboud (231590) | about 5 years ago | (#28807411)

It matters so much that companies that do a lot of trading set up their algorithmic trading facilities as close as is possible to their respective market/trading centers. EBS [wikipedia.org] has heavy-hitters collocated with them, and it can be a selling point, like this [marketfactory.com] .

Think of it this way:
In rough numbers, round-tripping 5000 miles, in light-speed-based latency alone, adds just under 55 milliseconds. That is *huge* in terms of algorithmic trading. These guys talk about the speed of light all the time.

It's frontrunning, not lag. (5, Interesting)

Maxo-Texas (864189) | about 5 years ago | (#28807519)

GS sees both the buy order and the sell order.

They can sell before large sell orders. Then buy again after to avoid a loss.
They can buy before large buy orders. Then sell right after to take a gain.

It's called front running and it's illegal.

But the government is not enforcing the law.

My theory is they are letting illegal activity go on to hold up the market prices.

I could be paranoid. But I've been in this thing for 28 years now and I've never seen such goofy market behavior and repeated evidence of price manipulation at market close on thin volume-- and yet there are no investigations.

Im probably dumb but (1)

Volda (1113105) | about 5 years ago | (#28807535)

Personally I think that ultra fast trading is bad for the economy. It causes artificial imbalences in how supply and demand, business values should work. It then gives way for people to abuse the system given enough money and speed. There should be limits on how much can be traded in any given time. If there were limits it would allow who ever it is that should be regulating the markets to put some breaks on things when they see a problem, at least until things stabilize without closing down the entire exchange or destroying peoples retirement funds in the blink of an eye.
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