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How To Profit From Planetary-Scale Computing

samzenpus posted more than 3 years ago | from the min-maxing dept.

Math 178

An anonymous reader writes "MIT physicist Alex Wissner-Gross and mathematician Cameron Freer have devised a technique for exploiting geographic location in high-frequency trading, reports FastCompany. From the article: 'We view this work as one of the first serious, credible justifications for covering the planet's surface with computers. [...] We've perhaps identified a new type of natural resources that sovereignties might take advantage of.' Physicist and hedge-fund manager Jean-Philippe Bouchaud says, 'This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.'"

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178 comments

FIRST!!!!! (3, Funny)

Anonymous Coward | more than 3 years ago | (#34157108)

Due to geographical locality!!!!!

Re:FIRST!!!!! (0)

Anonymous Coward | more than 3 years ago | (#34157286)

Can I get paid now for extracting all of the wealth from my speedy posting?

Is this that mysterious "..." before "Profit!" I've heard so much about?

Great Joke! (-1, Redundant)

Anonymous Coward | more than 3 years ago | (#34157486)

Q: what did the deaf, mute orphan get for Christmas?

A: Cancer

Re:FIRST!!!!! (1)

webmistressrachel (903577) | more than 3 years ago | (#34157938)

Oh, I see what you did there, getting F!r5t allows the other cheeky trolls top of the dicussion slots! Hooray!! Unfortunately, I have nothing interesting to say about this, other than the usual "In Soviet Russia..." crap, and you know how that goes. Okay, go mod-bombs.

Limits? (1)

WrongSizeGlass (838941) | more than 3 years ago | (#34157120)

'This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.'

Limits? Only if we stack them one computer high. If we start piling them up - especially those little mac Mini's - we'll exceed these perceived limits in no time.

Now if you'll excuse me I have to go invest in companies that sell outdoor extension cords for electronic trading workstations.

Re:Limits? (0)

Anonymous Coward | more than 3 years ago | (#34157164)

Read the article. They are talking about the speed of light. Lemme know when you have a first post plan on how to exceed that.

Re:Limits? (0)

Anonymous Coward | more than 3 years ago | (#34157214)

Quantum entanglement?

Re:Limits? (1)

buchner.johannes (1139593) | more than 3 years ago | (#34157256)

Quantum entanglement?

can't send information unfortunately

Re:Limits? (1, Insightful)

Anonymous Coward | more than 3 years ago | (#34157402)

To complete your argument you have to prove that profitable trading requires information transfer. Maybe it's possible to make money from mere FTL correlations?

Re:Limits? (4, Interesting)

camperslo (704715) | more than 3 years ago | (#34157468)

These guys go too far. One of these days we'll have botnets doing trading with funds from sniffed credit/debit info. They could even pay back what they took... then profits get dumped anonymously to campaign funds. Botnets do get free-speech rights don't they?? (they may have an opinion on capital gains taxes, or want to own broadcast stations)

If it makes anyone feel better, call that pile of computers a bank and lend it some "government" money

Trading in those strange mortgage death futures is too risky, botnet futures are the new thing.

Cylons and Skynet Terminators will have their own electronic religion making them tax exempt.

Re:Limits? (3, Insightful)

Anonymous Coward | more than 3 years ago | (#34157600)

These guys go too far. One of these days we'll have botnets doing trading with funds from sniffed credit/debit info. They could even pay back what they took... then profits get dumped anonymously to campaign funds. Botnets do get free-speech rights don't they?? (they may have an opinion on capital gains taxes, or want to own broadcast stations)

If it makes anyone feel better, call that pile of computers a bank and lend it some "government" money

Trading in those strange mortgage death futures is too risky, botnet futures are the new thing.

Cylons and Skynet Terminators will have their own electronic religion making them tax exempt.

That people are doing this is a sign of a broken fiancial system (as if fiat currency based on debt didn't already establish that). They are not producing anything. They are buying low and selling high units of wealth that others have produced. They are not creating wealth, they are redistributing it.

This is the kind of shit that has madmen and economists thinking you can forever grow an economy in a finite world with finite resources. It's also the kind of shit that encourages people to view stocks as a way to gamble and not as investments. You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.

Anyone else find that line in the summary amusing:

We've perhaps identified a new type of natural resources that sovereignties might take advantage of.

Yeah, computers and networks are a "natural resource". In fact I have a few growing in my backyard. I just have to water them from time to time. Really, WTF?

Re:Limits? (3, Insightful)

Merls the Sneaky (1031058) | more than 3 years ago | (#34157996)

You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.

What do you do with all the people renting investment properties now because they are not in a position to buy a home? If it wasn't for people investing in property there would be no rental market. I agree with you in principle but adjusting one thing has an effect on others. Solving the next problem then becomes the issue.

Re:Limits? (1, Informative)

Anonymous Coward | more than 3 years ago | (#34158538)

You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.

What do you do with all the people renting investment properties now because they are not in a position to buy a home? If it wasn't for people investing in property there would be no rental market. I agree with you in principle but adjusting one thing has an effect on others. Solving the next problem then becomes the issue.

Real simple. If I own a house that I rent out and have no intention of living in, that would be a commercial residential home.

That's still absolutely nothing like taking numbers of such properties, dividing them up into shares, and selling them as securities. Dig?

Re:Limits? (2, Insightful)

malakai (136531) | more than 3 years ago | (#34158954)

Real simple. If I own a house that I rent out and have no intention of living in, that would be a commercial residential home.

That's still absolutely nothing like taking numbers of such properties, dividing them up into shares, and selling them as securities. Dig?

No, what would happen is the lender would sell off that loan into a CMBS ( Commerical Mortgage Back Security). That CMBS would still be tranched out based on the risks of the asset pool ( it's not divided into shares ). And those tranches would be bought by any number of clients.

You seem to think the concept of Asset Backed Securities lead to the housing collapse. What lead to the housing collapse was simply banks giving loans they shouldn't have. Requiring 40% cash down on housing loans would have been another easy way to avoid all the problems.

Re:Limits? (2, Informative)

foniksonik (573572) | more than 3 years ago | (#34158566)

Without an arbitrary investment in rental properties housing prices would fall. Supply and demand. It's a fallacy to think that if you flood the market with homes prices will drop never mind the current bust scenario. It is the land that has value and by turning land into investment properties you make land more scarce for those who would buy a home to live in. This drives up prices for the land itself. Without rental properties the developers would be out as they need those investors to buy up the surplus lots. We would return to buying individual lots, hiring a contractor and architect and having a home built.

That would be a good thing, employing many more skilled craftsman and less premanufactured homes built in factories.

Re:Limits? (1)

Nursie (632944) | more than 3 years ago | (#34158654)

Without the massive inflation of the last decade, how many of us do you think would have bothered with renting?

Re:Limits? (3, Insightful)

Sean Hederman (870482) | more than 3 years ago | (#34159210)

This is the kind of shit that has madmen and economists thinking you can forever grow an economy in a finite world with finite resources

Umm, you can. Sure, there are far too many people getting paid well for completely non-productive work, but if I spend two weeks creating a compiler that makes me and my team twice as efficient I have not detracted from anyone else, but have grown the productive capacity of the world by a small amount. Economics is not a zero sum game.

Additionally, those "finite resources" you mention include the 120-odd petawatts of solar energy slamming into the Earth, and the massive tidal energies caused by the Moon's influence. Whilst both those are technically finite, they are not so in the context of this conversation. Any of that energy used for productive use is completely additive, taking away nothing.

I know I'm focusing on just one small aspect of your post, but this idea that economics is zero-sum and that there isn't real productive growth going on needs to be stomped.

FRISTPROST (-1, Offtopic)

Anonymous Coward | more than 3 years ago | (#34157122)

OR IS IT?

Wow! (3, Funny)

Jah-Wren Ryel (80510) | more than 3 years ago | (#34157126)

So, just when you thought HFT couldn't get any worse of a rep, now its going to turn our world into a dystopian matrix/terminator/cleopatra2525 place.
At least there's a chance of hot babes in leather and armored bikinis though! That's gotta count for something.

Re:Wow! (1)

siddesu (698447) | more than 3 years ago | (#34157278)

there's a chance of hot babes in leather and armored bikinis

Not unless they hire an eccentric Hollywood type for a manager. TFA didn't mention such thing.

Why the snow (0, Offtopic)

OzPeter (195038) | more than 3 years ago | (#34157128)

FFS why does every article that mentions Siberia always have a picture of snow? I lived there for 6 months and sure, in Winter it was -40 at night, but in the middle of Summer it was almost +40 celsius. It probably pisses me off almost as much as when people use a backwards facing latin R in order to be cutesy when writing English words in a pseudo Russian manner.

Or the fact that every story that mentions Penguins also has to show icebergs,

/rant

Yeah go on, mod me as an off-topic troll, but it doesn't change all the overused, bad and incorrect stereotypes

Re:Why the snow (5, Informative)

sirrunsalot (1575073) | more than 3 years ago | (#34157218)

The traveller who has never before experienced an arctic summer, and who has been accustomed to think of Siberia as a land of eternal snow and ice, cannot help being astonished at the sudden and wonderful development of animal and vegetable life throughout that country in the month of June, and the rapidity of the transition from winter to summer in the course of a few short weeks. In the early part of June it is frequently possible to travel in 'the vicinity of Gizhiga upon dog-sledges, while by the last of the same month the trees are all in full leaf, primroses, cowslips, buttercups, valerian, cinquefoil, and labrador tea, blossom everywhere upon the higher plains and river banks, and the thermometer at noon frequently reaches 70 deg. Fahr. in the shade. There is no spring, in the usual acceptation of the word, at all. The disappearance of snow and the appearance of vegetation are almost simultaneous; and although the tundras or moss steppes, continue for some time to hold water like a saturated sponge, they are covered with flowers and blossoming blueberry bushes, and show no traces of the long, cold winter which has so recently ended.

George Kennan, Tent Life in Siberia [gutenberg.org]

Seems completely stupid. (2, Insightful)

Anonymous Coward | more than 3 years ago | (#34157136)

This doesn't create any value for anyone.

Re:Seems completely stupid. (1, Insightful)

Anonymous Coward | more than 3 years ago | (#34157284)

Well they call it "a new type of natural resources" which sounds positive until you realize that they mean a new habitat for blood-sucking leaches.

Re:Seems completely stupid. (1)

sirrunsalot (1575073) | more than 3 years ago | (#34157334)

Naïvely agreed. If they had only put a cap on frequencies from day one, this whole arms race could have been subverted, but with $141 billion [wsj.com] being managed with high frequency trading, that seems quite impossible now. But I agree that there's no inherent value created by a market that rewards transactions that challenge the speed of light.

However, I recently learned that you can really lose out when you look at something and twist your face into a knot and start shouting about why it's completely worthless. I wrote a paper on limitations of a method and what can be attained; someone else used the limiting phenomenon in a new and innovative way (and made a lot of money).

And so I propose that we build a server farm at the true midpoint between New York, London, and Hong Kong. And so begins the Race to the Center of the Earth! Oh, and cooling might be an issue...

Another way to look at this: (5, Interesting)

Kupfernigk (1190345) | more than 3 years ago | (#34157148)

To what extent is so called high speed trading actually turning into electronic non-shooting warfare? Some of the techniques described are essentially variations on DDOS and spam. The recent Scandinavian case throws into question the point at which the techniques shade into illegality - is it just that if you or I do it, it is illegal, whereas if a bank does it, it's business as usual?

And to what extent is this latest proposal, while apparently to do with the distance between exchanges, also actually about putting resources into jurisdictions which have perhaps more elastic definitions of what constitutes legal trading?

On previous form, this will probably get moderated troll or flamebait. But it's actually two questions that I have never had adequately answered, except for the usual "you wouldn't understand" from the traders. If I, a graduate systems developer with further education in economics, can't understand them, what's the betting that our elected representatives can?

Re:Another way to look at this: (4, Insightful)

entotre (1929174) | more than 3 years ago | (#34157460)

what's the betting that our elected representatives can?

Don't worry, they have lobbyists to help them.

Re:Another way to look at this: (0)

Anonymous Coward | more than 3 years ago | (#34158518)

Sad but true. Because the legislator lacks expertise in basically any area, lobbyists and their ilk are responsible for educating them.

Re:Another way to look at this: (2, Interesting)

turtleshadow (180842) | more than 3 years ago | (#34157610)

Once long ago there was "a href="http://dssresources.com/history/sshistory.html"> vis-a-calc. Who would of thought today we'd be in the mess we are in.

Once long ago there was real and imminent fear that mutual self destruction would occur, and almost did, because the Nuclear C&C systems act out commands fast. Humans were inserted to cool things off.

Wow, now the Wall Street(s) have wired the financial & economic system together with less safeguards of global meltdown when the spreadsheets (now huge programs) start to ping pong (like in Forest Gump in china [youtube.com]) the markets. Its cool --- as long as you keep your eye on the ball.

However societies can't now rely on inserting humans into the chain. Anyhow Stock & Money Traders are not .mil hardy nor accountable like .mil

I cite May 6, 2010 [wikipedia.org] --- b !=m --- who programmed that billions of stocks could be sold without 2 person authorization?
I cite Jerome O'Hara, and George Perez [wikipedia.org], who worked on programatically cooking the system for Bernie Madoff

Re:Another way to look at this: (2, Interesting)

TubeSteak (669689) | more than 3 years ago | (#34157656)

And to what extent is this latest proposal, while apparently to do with the distance between exchanges, also actually about putting resources into jurisdictions which have perhaps more elastic definitions of what constitutes legal trading?

Lolwut? Did you RTFA?
I'm making an educated guess, but I'd say the answer to your question is "zero extent."
If you want to trade on [exchange] you have to play by [exchange]'s rules.
Basing yourself in another jurisdiction will not keep [exchange] from locking you out for bad behavior.

If I, a graduate systems developer with further education in economics, can't understand them, what's the betting that our elected representatives can?

Knowing how stock markets physically work isn't necessarily the kind of thing they teach you in economics.
Maybe you should keep furthering your education and audit some relevant business classes.

Re:Another way to look at this: (1, Informative)

Anonymous Coward | more than 3 years ago | (#34158496)

To what extent is so called high speed trading actually turning into electronic non-shooting warfare? Some of the techniques described are essentially variations on DDOS and spam. The recent Scandinavian case throws into question the point at which the techniques shade into illegality - is it just that if you or I do it, it is illegal, whereas if a bank does it, it's business as usual?

And to what extent is this latest proposal, while apparently to do with the distance between exchanges, also actually about putting resources into jurisdictions which have perhaps more elastic definitions of what constitutes legal trading?

On previous form, this will probably get moderated troll or flamebait. But it's actually two questions that I have never had adequately answered, except for the usual "you wouldn't understand" from the traders. If I, a graduate systems developer with further education in economics, can't understand them, what's the betting that our elected representatives can?

I'll try to answer your questions in the first paragraph. "Non-shooting warfare" is probably a good way to describe trading, whether high speed or not. Just like chess or Starcraft is non-shooting warfare. And also, unlike warfare, there's a strong mathematical argument that more trading is good for the market: more trading means more information being communicated, and reaching equilibrium more quickly. (In fact, many very smart people argue insider trading should be legal. I'm not sure I fully agree, but the fact is, the commodity market has loose insider trading laws and it seems to function very well. I wish I had a reference to some papers, but couldn't pull any up quickly.) Trading is most analagous to warfare in that you act purely in your own self interest: you buy when you think something is underpriced, and sell when it's overpriced, and--should your opponents be irrational--perhaps making trades to trick your opponents. The latter can fall in a gray area, since market manipulation is illegal, though the case law isn't entirely straightforward. Fortunately, markets with lots of traders and liquidity are the hardest to manipulate.

Legally there's no difference between what a bank and an individual trader can do. Actually the bank may have more pressure not to do sketchy trading strategies because (don't laugh, it's true) banks take their reputations very seriously, at least by the standards of the industry. Hedge funds, on the other hand, may be more willing to do gray-area trading since they do not have clients like banks do. I heard about the Scandinavian case, but I don't know all the details. Case law is a bit tricky as to what is market manipulation and what isn't. Certainly having good lawyers always helps, but they were definitely in a gray area.

Increases liquidity at what cost? (5, Interesting)

TubeSteak (669689) | more than 3 years ago | (#34157186)

Some of the more involved trading strategies exploit price fluctuations between separate exchanges: traders construct complex automated financial instruments designed to seek out and exploit price differences between a range of different shares or commodities on these exchanges. The uncertainty of price movements means that individual transactions cannot guarantee a profit, but firms can make steady profits by making millions of transactions each day.

Maybe we should be exploring cheaper ways to create market liquidity without allowing firms to siphon off profits through pure arbitrage.

Re:Increases liquidity at what cost? (1)

Nerdfest (867930) | more than 3 years ago | (#34157308)

Artificially limiting speed, or delaying orders until fixed points for example. When people start gaming the system, yes, measures should be put in place.

Re:Increases liquidity at what cost? (1)

Lehk228 (705449) | more than 3 years ago | (#34157696)

15 minute ticks, long enough for a human mind to react to and consider changes in strategy, even do a little bit of research

Re:Increases liquidity at what cost? (5, Interesting)

Rich0 (548339) | more than 3 years ago | (#34157752)

I don't get why we can't even just have one-day ticks. Every day an order book accumulates, and at 5PM the exchange executes everything at the price that generates the most volume. Priority is given to sellers who offer the lowest price and buyers who offer the highest price. Within a price orders are executed in random order.

The book is kept secret until after all trades are settled. So, you can't see if the price is trending towards a price you like and then put in a bunch of sells for 0.01 to get ahead of the line - if you put in that price you might just find your trades executing at that price.

With such a system ordinary investors can compete with investing houses. Bad news means that everybody loses out at the same time, and the insiders don't have nearly the same advantage (getting news 15 minutes early can make a HUGE difference today). You could even make the trade settlement time midnight or something like that so that it is well after the business day so that last-minute news has more time to get around.

You wouldn't need so many market-makers and other forms of arbitrage since the total daily volume of a stock will tend to guarantee that there will always be buyers and sellers. Market makers could still fill a niche in low-volume stocks making sure that there are always buy and sell orders in the book.

You could even go a step further and execute trades once per week/month/etc - that would start to make investing more of a long-term thing and less of exploiting market psychology..

Re:Increases liquidity at what cost? (3, Insightful)

turbidostato (878842) | more than 3 years ago | (#34157934)

"I don't get why we can't even just have one-day ticks."

I used to think the same, but now I feel some things are still untied.

"Every day an order book accumulates, and at 5PM the exchange executes everything at the price that generates the most volume."

It still would make it worth waiting to 4PM to order in case there are interesting late news. And then waiting till 4:50, 4:59, 4:59:59...

"Within a price orders are executed in random order."

Then I'd make sure not to issue a 10 million dollars order but 10 million orders for one dollar (or a cent, or a millicent or whatever is the lowest order).

"the insiders don't have nearly the same advantage (getting news 15 minutes early can make a HUGE difference today)"

But insiders still could take advantage of news produced at 4:59 that, depending on the system other couldn't take advantage of.

"You could even make the trade settlement time midnight or something like that so that it is well after the business day so that last-minute news has more time to get around."

You know the world is round and economy is global, don't you?

Re:Increases liquidity at what cost? (0)

Anonymous Coward | more than 3 years ago | (#34158660)

Your trade gets executed at some random time during the day?

Re:Increases liquidity at what cost? (0)

Anonymous Coward | more than 3 years ago | (#34158028)

Ya, that makes a lot of sense if you have no fucking clue what you're talking about.

Re:Increases liquidity at what cost? (1)

visualight (468005) | more than 3 years ago | (#34158176)

Adding a tick rate is so obviously the solution that the only reasonable explanation for it not being mandated already is corruption.

Re:Increases liquidity at what cost? (1, Insightful)

Anonymous Coward | more than 3 years ago | (#34158568)

Adding a tick rate is probably the most obvious way to reduce liquidity, it's a horrible idea.

It's definitely an obvious idea. If it were any good, the investor community (pensions, mutual funds, non-quant hedge funds) would be lobbying for it. They're not. The reality is, high-speed computer trading has given investors the best deal of their lives in terms of execution prices and ability to make large trades.

The only people screaming about high-frequency trading are the human market makers who've been left in the dust by their silicon counterparts.

Re:Increases liquidity at what cost? (1, Insightful)

Anonymous Coward | more than 3 years ago | (#34157330)

The thing is, arbitrage doesn't create liquidity, it simply capitalizes on the mistakes other people make. If someone shows up selling cotton 10 cents cheaper than everyone else, buying all the cotton and selling it to someone at regular price doesn't really create any true liquidity... sure the "volume" has doubled but that's just because you've become a middle man buying and reselling in the middle of a transaction that would have completed anyway.

The utility of arbitrage (2, Informative)

sjbe (173966) | more than 3 years ago | (#34157828)

The thing is, arbitrage doesn't create liquidity, it simply capitalizes on the mistakes other people make.

Generally speaking arbitrage depends on the existence of liquidity (the ability to sell an asset without greatly moving the price) in order to work. It's impossible to capitalize on a "mis-priced" asset if there is no market for that asset. That doesn't mean however that arbitrage is without value. Price convergence [wikipedia.org] is a common result of arbitrage and it tends to reduce price discrimination.

In a certain sense, all business is an exercise in statistical arbitrage - exploiting the difference in prices between two or more markets. You buy goods where they are cheap (possibly assembling them) and sell them where they are dear. Without the ability to exploit price spreads profit is impossible. If someone makes a "mistake" in pricing, we should expect someone to step in to take advantage of that mistake.

Re:The utility of arbitrage (2, Insightful)

martin-boundary (547041) | more than 3 years ago | (#34157850)

In a certain sense, all business is an exercise in statistical arbitrage - exploiting the difference in prices between two or more markets. You buy goods where they are cheap (possibly assembling them) and sell them where they are dear. Without the ability to exploit price spreads profit is impossible. If someone makes a "mistake" in pricing, we should expect someone to step in to take advantage of that mistake.

Nonsense. Businesses in your example introduce value, by taking care of shipping the products to/from the place of production to the place of sale. It's not statistical arbitrage at all, which alone creates no value, only number games.

There is no economic point in buying/selling a product in a factory without it ever leaving the factory.

Re:The utility of arbitrage (2, Informative)

sjbe (173966) | more than 3 years ago | (#34158302)

Businesses in your example introduce value, by taking care of shipping the products to/from the place of production to the place of sale.

Businesses DO introduce value by by shipping products where they are needed. They are exploiting the difference is value between two markets by doing so. That is by definition arbitrage.

It's not statistical arbitrage at all, which alone creates no value, only number games.

Sure it is - you just have to think about it in a slightly larger context. Statistical arbitrage occurs whenever there is a mispricing of price relationships that are true in expectation. In other words, you produce a good or service and ship it to market because you have an expectation of exploiting a difference in pricing. In the short term (just as with statistical arbitrage) events can occur that can introduce heavy short term losses. You also have to allow for the fact that people are imperfect and most decisions are made with imperfect information.

Oh, and arbitrage (statistical or otherwise) DOES often create value. It forces price convergence which in turn reduces price discrimination. This isn't always worth the costs but arbitrage does demonstrably have real value in the real world.

There is no economic point in buying/selling a product in a factory without it ever leaving the factory.

True but irrelevant to my point.

Re:The utility of arbitrage (1)

martin-boundary (547041) | more than 3 years ago | (#34158780)

Businesses DO introduce value by by shipping products where they are needed. They are exploiting the difference is value between two markets by doing so. That is by definition arbitrage.

I don't think arbitrage means what you think it means. Arbitrage occurs when a price difference leads to risk free profit at no cost, which is not what the businesses in your example do. There is essential risk in conducting their business (customers cannot be ordered to buy) and there is essential cost (shipping/warehousing is not free). These must be accounted for in the price difference which is being exploited, resulting in somewhat reduced profits.

Sure it is - you just have to think about it in a slightly larger context. Statistical arbitrage occurs whenever there is a mispricing of price relationships that are true in expectation. In other words, you produce a good or service and ship it to market because you have an expectation of exploiting a difference in pricing. In the short term (just as with statistical arbitrage) events can occur that can introduce heavy short term losses. You also have to allow for the fact that people are imperfect and most decisions are made with imperfect information.

That's overgeneralizing the meaning of statistical arbitrage imho. The shipping/factory business isn't engaging in trading of mispriced goods to make a (statistical) profit. It is actually creating the goods and/or importing the goods into a market where those goods were not previously available, to fill a (perceived) market opportunity. The decision process is different. In arbitrage, the mispricing is necessary as it is directly exploited, whereas in this case mispricings of the goods aren't necessary - all that matters is if there is (perceived) demand to cover the supply costs and make a profit.

For example, if there are 3 overpriced widgets in a market, but there is estimated demand for 10 widgets, then there is an opportunity. This opportunity would exist just the same if the original widgets were priced correctly, or even if they were priced too low.

Oh, and arbitrage (statistical or otherwise) DOES often create value. It forces price convergence which in turn reduces price discrimination. This isn't always worth the costs but arbitrage does demonstrably have real value in the real world.

It depends whether the arbitrageurs are also normal market participants or not, doesn't it? The real question is where the arbitrage profit goes. If it leaves the market, as it usually does, then this activity isn't valuable to other market participants. If it's a market participant who uses the profit for increased consumption or production, that's a different story.

Re:The utility of arbitrage (0)

Anonymous Coward | more than 3 years ago | (#34158656)

I think you two are talking past each other. Your description of how businesses create value sounds quite analagous to stat arb: moving something from one place to another. If I can see a point you're trying to make, then it's about a physical product versus an economic product. I can't agree that a physical product should be valued differently from an intangible product, especially when the intangible product is an abstraction of physical products (e.g. shares are ownership of companies; currency is an agreed upon abstraction of value; commodities futures are rights to a physical product).

Re:The utility of arbitrage (1)

turbidostato (878842) | more than 3 years ago | (#34158014)

"That doesn't mean however that arbitrage is without value. Price convergence is a common result of arbitrage and it tends to reduce price discrimination."

That's common wisdom but all those things are only true when an implicit is acomplished: arbitrage should offer an intrinsic value in exchange for the benefits it pumps off the system, usually making ends meet that otherwise wouldn't have met.

The exemplary arbitrage system is the silk route: it takes something from where it is more abundant/less valued to where it is scarce/more valued. Pay attention that value comes from relative scarcity. In exchange for fulfilling a useful task (providing something valued where it was scarce) the trader takes a benefit.

But that's not the case on "arbitrage-per-the-arbitrage" situations: they just take off a share that won't be used anywhere else (within the confined system) in exchange of anything; the seller and the buyer would meet each other nevertheless, so the arbitrage becomes a pure inefficency of the system.

"Without the ability to exploit price spreads profit is impossible."

If you limit yourself to be a trader, not a producer, that's true. But then, if you by trading don't add some value to the chain (like making some products avaliable where they wouldn't be otherwise), why the heck should you expect any profit to start with?

Re:The utility of arbitrage (1)

TubeSteak (669689) | more than 3 years ago | (#34158054)

In a certain sense, all business is an exercise in statistical arbitrage - exploiting the difference in prices between two or more markets. You buy goods where they are cheap (possibly assembling them) and sell them where they are dear.

You're confusing comparative advantage (and business in general) with arbitrage.
Arbitrage, statistical or otherwise, almost never involves taking delivery of goods.
Further, arbitrage rarely involves holding a position for more than a couple days.

The comparison you're trying to make isn't there.
Fundamentally, arbitrage is about taking advantage of imperfect communication in/across markets.

Re:The utility of arbitrage (1)

sjbe (173966) | more than 3 years ago | (#34158426)

You're confusing comparative advantage (and business in general) with arbitrage.

No I'm quite familiar with both and not confusing anything, but thanks for presuming slept through all the graduate finance courses I took and got my certification as an accountant out of a cracker jack box.

Comparative advantage has to do with profits derived from differing opportunity costs. What I'm talking about is that for anything to be sold at a profit, you have conditions where you can buy low and sell high. To do this you buy in one market and sell into another at a profit - basically arbitrage but not the academic deterministic version. In a sense (you missed that "in a sense" bit in my previous post) it's a bit like the anthropic principle - we know there was an profitable arbitrage opportunity because the conditions existed for a profit to be made.

No I'm NOT claiming that all business is actually a risk free arbitrage opportunity. I'm stating that statistical arbitrage is an interesting way to look at profit seeking when applied a bit more generally than is the norm.

Arbitrage, statistical or otherwise, almost never involves taking delivery of goods.
Further, arbitrage rarely involves holding a position for more than a couple days.

Only in academic models and only if you use the classical definition of arbitrage. You will note I said STATISTICAL arbitrage which only requires the expectation of profits and really can only be proven with an infinite timespan and an infinite bankroll. In the real world it suffers from model weakness, short term risk factors and a host of other problems - just like any real world business.

Re:Increases liquidity at what cost? (3, Insightful)

dpilot (134227) | more than 3 years ago | (#34157424)

How about this as a backup...

Investment doesn't, in and of itself, create wealth. Investment is putting money in the hands of people who CAN create wealth, but don't have enough money to do so on their own. The idea is that the investers should be rewarded for taking the financial gamble, and the people they invested in should be rewarded for having created something valuable.

High Frequency Trading screws them both.
High Frequency Trading is anathema to the very concept of investment - and the stock market.
We'd all be better off if the HFT people simply went to the races, instead.

Re:Increases liquidity at what cost? (5, Interesting)

Archangel Michael (180766) | more than 3 years ago | (#34157616)

A) Require 1/2 hour averaging for all trades. This will stop most arbitraging on two accounts: 1) it stops exploiting split second inefficiencies that can only be spotted by computers, 2) creates doubt to which price one is actually paying.

B) Tax all automated computer trades at 1%. Takes the profit motive out of computerized trading.

C) Charge all revocations of unused (non-expired) puts and calls a flat fee. This is to prevent flooding the market with option trades that people have no expectation of completing.

D) Tax profits made by short term traders at a higher rate than long term holder. I propose having several rates for capital gains based on how long a person holds a stock. Example (illustrative only) Less than two weeks @ 50%, less than six months@35%, 1 year @ 33%, 5years @25%, 10 years @10%, greater than 10 years @0%.

The problem isn't liquidity. Never was. Market is plenty liquid at 1/2 hour intervals. Low volume stocks need lower liquidity than high volume stock. The problem is exploitation of timing at split second intervals which can only be accomplished by computers, and has no basis in fundamental market principles. The goal should be to limit trades to people who actually hold stocks as investments, not in people making money off market fluctuations.

Trading is competitive (4, Insightful)

sjbe (173966) | more than 3 years ago | (#34158208)

A) Require 1/2 hour averaging for all trades.

B) Tax all automated computer trades at 1%.

Result - trading moves to another exchange where this is not required. Your solutions depend on international cooperation between government and exchanges, all of which compete with each other. Good freaking luck getting policies like that instituted.

Re:Trading is competitive (0)

Anonymous Coward | more than 3 years ago | (#34158706)

The point is who gives a fuck if the high frequency traders move to another exchange.

what could possibly go wrong? (1)

skywatcher2501 (1608209) | more than 3 years ago | (#34157236)

hmm covering the planet's surface with computers...

*turns around looking for electromagnetic discharges and robots from the future*

The Dangers of Planet-scale computing (1)

Keebler71 (520908) | more than 3 years ago | (#34157248)

I think it has been well documented that planet-scale computing leads to disaster. I for one don't want to be destroyed by the Vogons just before the computer produces its answer...

...serious, credible justifications... (2, Insightful)

Anonymous Coward | more than 3 years ago | (#34157250)

I would say anyone knowledgeable and not directly benefiting from HFT would rather take this as a serious, credible justification to ban this tax on serious, honest investors.
But Wallstreet's buddies in Washington will make sure this won't happen until another flash crash takes the DOW pinning for the Fjords.
Hope you voted for change and hope, lulz.

Silly flat-earthers! (4, Insightful)

goodmanj (234846) | more than 3 years ago | (#34157306)

You're thinking too two-dimensionally. Think carefully: what location minimizes the average distance to every spot on the Earth's surface? I'll tell you right now it's not in Siberia! But you should probably spend some extra money on the air conditioning system for your server farm if you want to set up shop there.

Re:Silly flat-earthers! (1)

sirrunsalot (1575073) | more than 3 years ago | (#34157390)

Hell? Aha! Get those blood-sucking money-grubbing high-frequency investors a bit of whiskey and they'll be right at home down there! Perhaps all those people that can be heard shouting, "See you in hell you sonsabitches!" will be right after all!

That was unfair and uncalled for. I know, I know. But it sure felt good to say.

Re:Silly flat-earthers! (1)

zill (1690130) | more than 3 years ago | (#34157418)

My position being relocated to Hell? Fine, but I expect a huge relocation bonus and a raise for all this trouble.

Better brush up on Windows Server 2008 too, since that's probably all they're running down there.

Re:Silly flat-earthers! (1)

sirrunsalot (1575073) | more than 3 years ago | (#34157444)

Nothing personal—just feeling hyperbolical tonight and you have to admit that it was kinda set up for a slam-dunk. But I'll do my best to resist fanning the flames in the future.

Re:Silly flat-earthers! (1)

Tailhook (98486) | more than 3 years ago | (#34157606)

Think carefully

Your strategy is doomed! Surface light time from NY to London is 0.0186ms while it's 0.0212ms to the center of the Earth from either point. A tunnel bored directly between London and New York would be even faster and require less cooling. Only two points intersecting the center would be competitive with my Earth Chord Trading Tunnels!

Re:Silly flat-earthers! (1)

goodmanj (234846) | more than 3 years ago | (#34158450)

Ah, but if you want to trade with New York, London, *and* Shanghai, your NY-London chord doesn't look so good. In the limit that you want your trading center to simultaneously minimize the distance to *every* point on the Earth's surface, the center of the Earth is the way to go. ...still not sure why my OP got modded "insightful", I was shooting for "funny". But I'll take what I can get.

Highly Amoral (4, Interesting)

gweihir (88907) | more than 3 years ago | (#34157316)

HFT is done by the greediest scum of the earth. It is an approach that is highly instable and can do tremendous damage. It is high time this practice is outlawed. Considering that fast stock trading does not produce anything, but only serves to shuffle money around, tolerating such a destabilization risk is completely unacceptable.

Personally, I would add a mandatory random delay in the 15-30 minute range to each stock transaction. Or maybe even a few hours. This would curb speculation, while at the same time beneficial effects, like a company getting money to invest from an IPO would still work.

Re:Highly Amoral (4, Interesting)

peter hoffman (2017) | more than 3 years ago | (#34157632)

If HFT were to be legislatively controlled, it seems to me the most obvious way to do it would be by modifying the long and short term capital gains taxes to create a progressive system: the longer you hold the asset before taking the capital gain, the less tax you pay. If you had to pay 99% tax on a gain resulting from possessing an asset for less than 1 minute things would be a lot different.

This is not to say that I favor that solution, it's just one that occurs to me. I think there's a solution that doesn't require the use of force. If I were the CEO of a publicly company, I would not want to be listed on an exchange that allows HFT. If I were an amateur investor in stocks, I would not want to invest in companies listed on an exchange that allows HFT. As a result, there's clearly a market for a 'natural' exchange as opposed to one that is 'on steroids'.

Re:Highly Amoral (0)

Anonymous Coward | more than 3 years ago | (#34158432)

HFT has the effect of removing market inefficiencies. It is the most free market friendly thing in the world.

Wont work in Dark Pools (3, Interesting)

xquark (649804) | more than 3 years ago | (#34157324)

This technqiue wont work with orders processed in dark pools. And as the trends are showing larger and larger proportions of ADV are being done in dark pools. I would think gaming dark-pools would be the primary objective and not going after some boring 80s movie plot.... (Can anyone remember "Fair Game" with Cindy Crawford).

Accelerando (2, Funny)

Guppy (12314) | more than 3 years ago | (#34157328)

This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.

Not yet, not until the Vile Offspring [wikipedia.org] are born, and consume their parents...

The last time a planetary scale computer was built (2, Informative)

scourfish (573542) | more than 3 years ago | (#34157362)

it got destroyed just 5 minutes before the question was computed.

Time for a rant... (3, Insightful)

brxndxn (461473) | more than 3 years ago | (#34157404)

God dammit! I'm pissed off again.. I'm pissed off because everyone wants to 'study' HFT or 'discuss' HFT.. and no one seems to understand the big picture! HFT is ruining the fucking stock market. HFT is destroying the opportunities for the middle class.. destroying their retirements.. and ruining the confidence in the market. HFT is making the criminally rich even richer! Everyone likes to talk about HFT and bitch about it - and the people that benefit most from total stupidity that is HFT are the ones that get to enact the policy through lobbying and backroom revolving-door politics.

HFT does one thing... It exploits the gaps in bid and ask price during execution to make money off the actual market orders. But, if the market is no longer correctly offering 'market' prices because of instantly-changing outside influences, how the fuck is it still a market and not a scam? The only people saying HFT is a good thing are the people benefiting from HFT.

There's tons of easy ways to fix the problems created by HFT exploiting.. Here's a few ideas:

1. random delay.. Issue an 'instantaneous' delay in ALL trade execution from all firms. In essence.. make the delay long enough to completely ruin HFT but short enough that no human executing a trade would ever be affected.

2. trading tax.. Tax all trades by a negligible amount. Firms that actually invest will not be affected.

IMO, this article is yet another example of solutions for a problem by exacerbating the problem.. So, fuck you, MIT physicist Alex Wissner-Gross and mathematician Cameron Freer.

Re:Time for a rant... (4, Informative)

christoofar (451967) | more than 3 years ago | (#34157652)

Hear hear.

I pulled out 100K out of the markets because I can't just put up with HFT anymore. So Buy and Hold was a bad idea. Now investing is a bad idea.

You can't put in a stop-loss order anymore on anything you own because every day you have to worry if a mini-flash crash hit one of your issues and triggered it, then the SX won't unwind YOUR trade but they are glad to unwind the fuck-up trades the HFT guys caused.

Re:Time for a rant... (2, Insightful)

TooMuchToDo (882796) | more than 3 years ago | (#34158560)

+1

After interviewing with an HFT firm in Chicago and understanding how their business worked (I was to work with the CTO to help squeeze every last microsecond out of their trading infrastructure colo'd at markets around the world), I cashed my entire 401k/IRAs out of the stock market. I might as well go to a casino.

Re:Time for a rant... (1)

Reteo Varala (743) | more than 3 years ago | (#34157690)

Ruining the stock market =/= ruining the market. The stock market is simply a way to trade ownership in government-regulated organizations, big hulking behemoths that only want one thing... more money. They will make substandard products, cut corners like crazy, perform unconscionable acts to do so, and lobby to alter the laws to benefit them. It is because of this system that copyrights have gained an order of magnitude in length, software patents exist, the US has been waging wars for oil, and all manner of large-scale ecological damage has been produced. It is because of this system that rampant consumerism exists, buying things that will fail for a short period of time in order that more things are purchased, only to see them fail in a similarly-small time period. The only problem is that the transition involved would be a very devastating blow to people who have come to depend on it.

Re:Time for a rant... (1)

failedlogic (627314) | more than 3 years ago | (#34157824)

"2. trading tax.. Tax all trades by a negligible amount. Firms that actually invest will not be affected."

I would agree but, I presume you are advocating such regulation in the U.S. Unless other countries share the same view and tax the heck out of HFTs the problem is not going to go away. I could see the EU and Canada joining in, but there are many other questionable countries that probably won't participate. In fact some might even *want* to participate if only to effect the American exchanges.

I think a combination of both your proposed ideas would work best. The trading tax will prevent Americans from HFT on domestic and foreign markets and the random dealy (assuming we are dealing with domestic exchanges only) will prevent those that aren't encumbered by the taxation from even being able to HFT. The "random" delays would need to be in the range of more than a few minutes.

I might suggest something like being required to have an HFT account if you want to participate in these kinds of trades. And in order to execute, have something on the level of a captcha system where once the delay to be able to trade again expires, you can't make a trade until the captca is entered and have one that can't be detected by the programs. This might make HFT suck more for the HFTers.

Re:Time for a rant... (1)

metrometro (1092237) | more than 3 years ago | (#34157978)

Unless other countries share the same view and tax the heck out of HFTs the problem is not going to go away. I could see the EU and Canada joining in, but there are many other questionable countries that probably won't participate.

Driving the assholes to another exchange isn't a bug, it's a feature. Having the only exchange that everyone can trust is a pretty good position to be in.

Re:Time for a rant... (0)

Anonymous Coward | more than 3 years ago | (#34158638)

the financial system is dependent on the rule of law. trading firms cannot just go to random countries. so EU+CANADA+USA seems plenty. surely against the supremacy of the USA it will be difficult to do global trading.

Re:Time for a rant... (1)

rastoboy29 (807168) | more than 3 years ago | (#34158872)

You do realize that your sig says we need more Ron Paul, but you're advocating a rather significant intervention with the free market.

I happen to agree with both sentiments, but just thought I'd point that out :-P

HFT is Not a Sin (1)

Eightbitgnosis (1571875) | more than 3 years ago | (#34157438)

If they aren't front running their trades by putting up orders they have no intention of filling then what's the problem?

They're buying something in one place that they believe will grow in value at another place. Isn't this the goal of all trade?

Re:HFT is Not a Sin (2, Insightful)

0123456 (636235) | more than 3 years ago | (#34157628)

They're buying something in one place that they believe will grow in value at another place. Isn't this the goal of all trade?

Suppose I got to the store to buy a bag of chips. I pick up the last bag from the shelf and go to buy it. You jump in front, grab the chips from from me, pay the guy and then tell me that you'll sell me the chips to me for only a dollar more than the price on the shelf.

Who has benefited from this other than the thieving scum who got in the way of my trade with the store owner?

Re:HFT is Not a Sin (0)

Anonymous Coward | more than 3 years ago | (#34157814)

Well, since there is currently a crisis with regards to obesity, the fact that he took that bag of chips away from you only benefits the community in general, and you in particular. There is a lot of fat in those chips, and they are not good for you. If you can not curb your appetite like the healthier individuals on this planet, perhaps the government should be responsible and control what you eat... Oh wait!!! you don't want the government to control what and how you eat? well then I guess you will understand that those of us who are in the financial market do not want the government to control whether it is automated or manually or at what speeds we make our transactions.

Re:HFT is Not a Sin (1)

Renraku (518261) | more than 3 years ago | (#34157844)

The chip producer might end up with reduced profits, or they might end up with the same profit. Net result: Negatively affected.
The chip seller might end up with reduced profits, or they might end up with the same profit. Net result: Negatively affected.
The 'trader' might end up with increased profits, or they might end up with the same profit. Net result: Positively affected.
The buyer might end up paying more, or they might not buy the chips. Net result: Negatively affected.

A good or service is only worth what people are willing to pay. The 'trader' is the only one that benefits. For everyone else, it makes the sale less likely and more expensive.

Re:HFT is Not a Sin (1)

hairyfeet (841228) | more than 3 years ago | (#34158282)

You are forgetting one little thing: The "trader" scum can get stuck with the chips, which he then declares himself (with the help of some bribes...err campaign contributions) "too big to get stuck with these chips" and then YOU get to pay for them, whether you wanted them or not. I'd agree with you 100% if these scumbums got stuck with the check when they treat the market like Vegas and fuck up, but they DO NOT. WE DO.

Re:HFT is Not a Sin (4, Insightful)

christoofar (451967) | more than 3 years ago | (#34157688)

Yes it IS a sin.

It's a SIN because the heads of NYSE and NASDAQ continue to spread this lie that HFT shops contribute liquidity to the system. THEY DO ANYTHING BUT!

Have you seen the offices these HFT shops rent out in New Jersey and CT? They're cheap Class B space, warehouse loft and other low-rent space. They don't have the capital it takes to be a market maker. They just have capital---and they aren't going to sit in the market when it is hurting and make trades no sane person would make to keep liquidity flowing.

That is the job of a REAL market-maker. A market-maker will step in and be the counterparty to keep the issues they are responsible on the exchange moving.

What the fuck do you think happened on the May 6 flash crash? Almost all the HFT shops ran to their server rooms and SIGSEGV their software and pulled out to avoid taking more pain. The bids all dried up on the NYSE which is why the first crazy market order for $0.01 a share came to the exchanges, NASDAQ cleared it so for a while, several stocks were at zero print... like Accenture.

When you have the most top companies on your exchange printing zero in the flash of an eye... YOUR MARKET IS BROKEN. How is this even debatable?

Why would I want to put the kids college fund money in this fucking disaster?

HFT sucks.

Re:HFT is Not a Sin (4, Insightful)

christoofar (451967) | more than 3 years ago | (#34157712)

Another lie the chairs of NASDAQ and NYSE love to tell the world is that HFT speeds up price discovery.

How is this even POSSIBLY true??? They are algos. Those algos don't have any clue what the future performance of a company is. The algos are not going to tell you how successful AAPL's iPhone 5 will be, or when the next class action lawsuit is coming.

And algos break ALL THE TIME. It has been happening more often these days because stocks are breaking 120DMA more often, and most of these algos are doing nothing but backtracing trends on top of their arbitrage schemes. When a big investor comes in the room, they jump on him like nervous poodles.

That's why the May 6 event was such an eye opener. Waddle and Reed didn't cause the flash crash. They executed a normal transaction that wasn't even a Big Fish transaction, and all the algos went haywire.

So much for the quants and their MIT-smartness.

Re:HFT is Not a Sin (3, Insightful)

metrometro (1092237) | more than 3 years ago | (#34157994)

Uh, no. The goal of all trade is to allocate capital to the institutions most likely to create value. HFTs don't give a shit who creates value. They don't allocate capital based on which companies are useful. They are a transactional cost paid by everyone else. They are best approximated not as a trade, but as a tax, albeit one that does absolutely nothing for the public good. The value removed from the markets by HFT is value extraction, not creation. This is a fundamental difference from everyone else playing.

This is a great plan! (2, Insightful)

Anonymous Coward | more than 3 years ago | (#34157564)

Step 1: get all the people responsible for HFT to move to a base at the bottom of the ocean.

Step 2: turn off the oxygen.

Step 3: Celebrate, then start thinking of how to get all the lawyers to move to Siberia as well.

Re:This is a great plan! (1)

Lehk228 (705449) | more than 3 years ago | (#34157722)

don't turn off the oxygen, that would be a cruel and slow death. turn the water on, all the way

It sickens me (0)

Anonymous Coward | more than 3 years ago | (#34157570)

It sickens me that people everywhere think that the ability to exploit something for personal profit is a credible justification for anything.

Jump-in-line trading should be illegal (1)

davidwr (791652) | more than 3 years ago | (#34157572)

Financial exchanges should have a "10-second" fairness rule on public trades:

* If the trade does not have an imposed deadline on it then each up-bid delays the trade by 10 seconds and no "high bid" can be withdrawn for 20 seconds, giving the seller two full waiting periods to accept what may be the winning bid.

* If the trade must be executed by a certain time, bidding UP ends 10 seconds before but anyone is free to match the bid up until the clock runs out, at which the trade is assigned by lot or divvied up among the bidders in a way that is "fair" but which gives the first high bid a slightly better opportunity to buy as a reward for not stalling. Bids would also have a 20-second "lock in" period so those made near the end couldn't be withdrawn before the seller had a chance to accept them. If you make your bid, you are stuck with the results.

* Trading houses would have the option to stay open past the closing bell for individual trades that were in the process of being bidded up - that is, those who had a new bid in the last 10 seconds. This is to allow trading-houses to not turn their closing bell into an artificially imposed a deadline on a trade when the seller doesn't impose one.

This would all but eliminate the advantage of high-frequency trading. True, there would be a minor advantage for people who made the "high bid" exactly 10 seconds before the deadline under this scheme, but those matching the bid wouldn't fare much worse.

10 seconds is a straw number - the real number should be high enough so that ultra-fast-trading isn't an issue, but not higher. Realistically, that's probably more like a few seconds or less for stocks traded on only one exchange, longer for stocks traded on multiple exchanges.

I'm sure there are problems with this that I haven't thought about but it would solve the problem of fairness for those who aren't able to execute super-fast trades.

Oh. (1)

drolli (522659) | more than 3 years ago | (#34157782)

So basically humankind does not have enough problem to solve? We really need to create incredible complicated games to keep our computer busy?

wont last long (1)

Charliemopps (1157495) | more than 3 years ago | (#34157900)

This is something that has a very high potential to cause a real problem in the markets... and already has several times, they just weren't high enough profile to get the publics attention. But if they really bring down the markets for a day, or cause some sort of crash that impacts the average persons 401k or pension, governments all over the world will be happy to jump on the "Rich people are the bad guys" bandwagon and outlaw this sort of thing outright. Simple laws like, you must own a stock for a minimum of 4hrs before selling it, would end this kind of trading over night.

if you take justification very loosely, maybe (1)

Trepidity (597) | more than 3 years ago | (#34157960)

We view this work as one of the first serious, credible justifications for covering the planet's surface with computers.

Uhh... it doesn't seem like a very good one. If there is any good reason to "cover[] the planet's surface with computers", it had better be doing something more useful than providing some fucking stock market liquidity.

Planetary Scale Computing (1)

Stargoat (658863) | more than 3 years ago | (#34158600)

I think the greatest advantage of planetary computing is in its ability to find questions for provided answers. For example, if you were to have a question regarding Life, The Universe, and Everything, then planetary computing might be useful.

So much misinformation (2, Interesting)

Anonymous Coward | more than 3 years ago | (#34158934)

Let me begin by saying that I'm posting anonymously because I'm a professional in the financial industry.

First, I'll explain the inter-exchange arbitrage being used here: it comes in a few forms. Imagine the Philadelphia exchange has orders on its book for a share of Apple Inc stock (ticker AAPL) as follows: 200 to buy for $308.12 and 300 to sell at $308.14. The New York exchange has 500 to buy for $308.13 and 100 to sell at $308.14 . There's nothing anyone can do to make a profit.

Then things change. Perhaps someone does a trade in New York, taking out the orders on the sell side of the book. New York is now having 150 to buy at $308.15 and 700 to sell at $308.16. Since $308.15 > $308.14, someone can buy in Philadelphia and sell in New York, making a penny profit on 150 shares.

The first company to notice this and send the necessary electronic order messages makes $1.50. Repeat as necessary.

More complex versions of this same trade involve the same stock traded in different currencies, requiring a currency hedge at the same time. But the idea remains the same.

This sort of arbitrage has ALWAYS taken place in the markets. The HF traders don't do anything differently from what has historically been done, in this or really any other strategy. They just do it faster. Market makers have historically held small positions, by the way. Other posters who assume they used to hold millions in inventory are exaggerating. I don't see HF as any kind of slimy behavior, and I say this as someone whose firm is on the other side (i.e. the HF firms take money from us, lots of it, every day).

Regulations designed specifically to remove the profits of HF firms are neither wise nor beneficial. Regulations should concentrate on ensuring the markets are fair, efficient and reliable. If those regulations have the emergent property of killing the HF firms, that's fine.

It's worth noting that fairness, efficiency and reliability are sometimes competing goals. To take a low-frequency example, insider trading is illegal in the USA but not in some other places, and economists generally consider that information propagation is more efficient in those other places, at the obvious cost of diminished fairness.

The valid concerns about HF trading are not the profits made by those firms (which are anyway estimated to have a ceiling of $21B industry-wide by a well-known academic paper -- a fraction of investment banking profits). The valid concerns about HF are market stability and fairness.

I view fairness as having decreased with the advent of HF, in that HF firms are now likelier to prevent Joe Blow from trading "on the bid" or "on the offer". That's a cost to Joe Blow. On the other hand, bid-offer spreads have narrowed considerably, due mainly to the savage competition in HF. On the whole, Joe Blow therefore buys or sells at a better price than he used to. I therefore think the loss in fairness has been more than compensated by this increase in efficiency.

The situation is a little vaguer for big traders like my firm, where we trade so many shares that we have to worry about being "detected" and having markets move against us. But even for us I think the tradeoff is worth it.

Now let's consider market stability. Complex dynamic systems are subject to occasional wild behavior. This is even true of ones involving humans, as with the Dutch Tulip craze or the recent real-estate bubble. Dynamic systems run by machines can enter undesirable states faster than humans can usefully respond.

May 6 2010 is cited as an example, though I'll note that the crash happened over many minutes, not in mere milliseconds, and therefore was actually well within the range of human reaction times. Many human traders, some at our firm, made big profits off those using machines. This in itself serves as an excellent correction and lesson to those relying too much machines to trade, and has helped put humans back in the loop at many places, I'm sure.

It's also worth noting that folks who lost big money in the flash crash had submitted "market orders". That is an order saying, in effect, that "I will trade at any price, just get it done". Well, in that case the flash crash is a stupidity tax. Do you buy your stereo by handing a blank check to the clerk at Best Buy?

Triggers put in place (because of May 6) won't let quite the same event happen again. Will there be another exhibition of instability sometime? Sure, but I give it only 50-50 odds it will be machine related. And, if machine related, will probably be less damaging to the economy than the human-originated kind.

mond Up (-1, Flamebait)

Anonymous Coward | more than 3 years ago | (#34158988)

they are Come on PARTS OF YOU ARE LEARN WHAT MISTAKES the point more lubrication. You loNg term survival some intelligent as possible? How

Nothing wrong with HFT (1)

Sean Hederman (870482) | more than 3 years ago | (#34159248)

Most of the posts here seem to be suggesting that HFT be scrapped in one form or another. I have a somewhat contrarian view; who cares? Arbitrage has always been a very technical field that normal day traders never got involved in much anyway. The HFT's now just make human arbitrage impossible, and scoop up a little cash by keeping markets consistent. You see, arbitrage exists because there's discrepancies, and HFT helps smooths those discrepancies out.

If you're a value investor buying shares in a company whose growth you believe in and intend to hold on to them for years, then HFT does not affect you at all. If you're a day trader trying to guess the direction of the stock market, they don't affect you either: you're still screwed; just like you would have been a decade ago. If you're a day trader trying to arbitrage, sure, these have put you out of business. But I suspect that's a rather small group.

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