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How Linux Mastered Wall Street

Soulskill posted more than 3 years ago | from the penguins-in-charge dept.

The Almighty Buck 339

itwbennett writes "Linux has become a dominant player in finance thanks to its ability to pass messages very quickly, said Linux kernel contributor Christoph Lameter. 'The trading shops saw that the lowest-latency solutions would only be possible with Linux,' Lameter said. 'The older Unixes couldn't move as fast as Linux did.' One key attribute was the TCP/IP stack, the configuration of which determines how fast a message can be passed between two systems. Linux also offers financial firms the ability to modify the source code to further speed performance. 'It depends on how daring the exchange is,' he said, noting that NASDAQ uses a modified version of the Gentoo Linux distribution. Lameter will discuss how Linux became widely adopted by financial exchanges at the LinuxCon conference in Vancouver this week."

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NASDAQ uses Gentoo? (5, Insightful)

suso (153703) | more than 3 years ago | (#37100908)

Oh dear god our economy is a whole lot more fragile than I ever imagined. Brings a new meaning to "emerge world".

Re:NASDAQ uses Gentoo? (1)

intellitech (1912116) | more than 3 years ago | (#37100934)

No kidding. They should switch to Debian ;)

And, what exactly do they mean by "modified version?"

Re:NASDAQ uses Gentoo? (3, Funny)

Oxford_Comma_Lover (1679530) | more than 3 years ago | (#37101082)

Nah, they should switch to Macs. There's nothing like running a TCP/IP stack that reuses a modified copy of old FreeBSD code without changing the comments. =)

Re:NASDAQ uses Gentoo? (0)

Anonymous Coward | more than 3 years ago | (#37101116)

You mean like Windows?

Re:NASDAQ uses Gentoo? (3, Insightful)

BitZtream (692029) | more than 3 years ago | (#37101652)

Thats kind of the point of BSD licensed code ...

They'd be much better off switching to FreeBSD since its known to have the fastest IP stack in existence, hence why its used for high end networking gear. Let me know when you see your BigIP running something other than FreeBSD.

FBSD vs Linux IP stack (0)

Anonymous Coward | more than 3 years ago | (#37101960)

Is Google big enough for you? If they're betting on Linux, then I'm comfortable with it!

Re:NASDAQ uses Gentoo? (2)

abigor (540274) | more than 3 years ago | (#37101808)

Nah, they should switch to Macs. There's nothing like running a TCP/IP stack that reuses a modified copy of old FreeBSD code without changing the comments. =)

Why would they change the comments if they are reusing code that works? Just for the heck of it?

Re:NASDAQ uses Gentoo? (1)

Oxford_Comma_Lover (1679530) | more than 3 years ago | (#37101954)

*modified* copy. They changed the code without changing the comments to reflect what the code was now doing. The code was not especially readable to begin with (being low-level TCP/IP code).

Re:NASDAQ uses Gentoo? (0)

Anonymous Coward | more than 3 years ago | (#37100956)

They had to. I mean, just try in Ubuntu Software Manager to download "Wall Street Quote Processor" or "Wall Street Rapid Trade" - it's not there!

Re:NASDAQ uses Gentoo? (4, Funny)

basketcase (114777) | more than 3 years ago | (#37101074)

So, what do I add to USE or CFLAGS to be able to call myself rich using imaginary money? CFLAGS="-fmake-money"? USE="federal_reserve"?

WELL, SO DOES RED CHINA !! (0)

Anonymous Coward | more than 3 years ago | (#37100936)

But I don't see too many thinking that's a big deal, either !!

I dont care of WallStreet likes linux (3, Informative)

FudRucker (866063) | more than 3 years ago | (#37100938)

I still wont trust WallStreet with my money, which would be about like trusting an alcoholic with the beer at a party...

Re:I dont care of WallStreet likes linux (1, Insightful)

Anonymous Coward | more than 3 years ago | (#37101086)

Really? So you keep your bills under the mattress do you?

Re:I dont care of WallStreet likes linux (2)

hedwards (940851) | more than 3 years ago | (#37102018)

For 0.1% interest, I don't see any incentive not to. At least this way you don't have bankers getting rich off your money.

Re:I dont care of WallStreet likes linux (3, Insightful)

migla (1099771) | more than 3 years ago | (#37101100)

I still wont trust WallStreet with my money, which would be about like trusting an alcoholic with the beer at a party...

I don't know how it is over there, but over here in Sweden everyone has money in the stock market as all pensions were moved there some years ago. We're all supposed to choose where to invest them and to care about the wellbeing of Wall Street.

Kind of unfair advantage given to the propagandists of one economic system over another, in my opinion.

Re:I dont care of WallStreet likes linux (2, Insightful)

throbber (72924) | more than 3 years ago | (#37101106)

So you don't have a pension / 401k.

Or a bank savings account.

Poor you.

Re:I dont care of WallStreet likes linux (1)

FudRucker (866063) | more than 3 years ago | (#37101174)

i have a few Gs in a savings account but i could pull it out any time i wanted it, and there would more than likely be a few bucks in interest added to it...

Re:I dont care of WallStreet likes linux (2)

Yvanhoe (564877) | more than 3 years ago | (#37101186)

Or I live in a "socialist" European country.

Re:I dont care of WallStreet likes linux (1)

hedwards (940851) | more than 3 years ago | (#37102034)

Savings accounts are for suckers. The Pension system in the US is an absolute disgrace though. It's not unheard of for HR reps to lose the paper work for people to apply for their 401k accounts.

Re:I dont care of WallStreet likes linux (1)

interkin3tic (1469267) | more than 3 years ago | (#37101114)

To be fair, alcoholics are often better at finding alcohol than us normal people. I could definitely see some alcoholics I knew in college taking an "investment" of one can of keystone and parlaying it into a handle of vodka before too long.

It's too bad they don't use those skills in other areas. My friend Paul might be able to pay down the national debt. Hmm.... Maybe if we could consolidate all of our debt with Russia...

Re:I dont care of WallStreet likes linux (1)

benjamindees (441808) | more than 3 years ago | (#37102056)

It's not theft. It's "providing liquidity".

Re:I dont care of WallStreet likes linux (2)

SCVirus (774240) | more than 3 years ago | (#37101976)

If you don't have money in the stock market directly, you have it there indirectly. In this case you are almost as vulnerable, and pay a massive tax to those you don't trust.

thanks for whoring quants (5, Insightful)

decora (1710862) | more than 3 years ago | (#37100958)

lets just ignore the fact that the Great Recession was directly enabled by the PHDs who turned their eyes askance at what the Gaussian Copula Function code was being used for. Not your problem right? You just make a tool, not your responsibility how others use it.

you had five kids to feed.

Re:thanks for whoring quants (0, Funny)

Anonymous Coward | more than 3 years ago | (#37101010)

Looks like some aspie got dinged on his interview with Goldman.

no, but my tax dollars (1)

decora (1710862) | more than 3 years ago | (#37101184)

are the only reason that Goldman exists right now.

Re:no, but my tax dollars (1)

Anonymous Coward | more than 3 years ago | (#37101254)

not exactly. Goldman wasn't just in the middle of the bullshit mania everyone else was doing. They were actively trading and setting up hedges for when it all collapsed. They would have survived, a bit bruised, but they'd still be around.

Bruised absolutely, (0)

Anonymous Coward | more than 3 years ago | (#37101606)

but not relatively. The general economic downturn affected them as well, but in relative terms their wealth ballooned. They got rich off of the whole thing even without a bailout.

contradicts basically every book written (2)

decora (1710862) | more than 3 years ago | (#37101862)

about the crisis. including

On the Brink by Henry Paulson, who was CEO of Goldman until 2006, and sec. of treasury during the crash

Too Big to Fail, Andrew Ross Sorkin

etc etc etc.

if Merrill hadn't been bought by BoA, and Morgan Stanley hadn't been bailed out by the Japanese banks, then Goldman would have fallen soon after.

Goldman got its credit default swap deals with AIG payed off, 100 cents on the dollars, when they werent even worth a fraction of that... payed off when taxpayers bailed out AIG. if AIG had gone down, goldman would have gone down, crash, explosion. none of its 'big shorts' (or 'hedges' as lloyd blankfein likes to describe it, but alot of other people dont) would have worked.

Re:thanks for whoring quants (1)

antifoidulus (807088) | more than 3 years ago | (#37101288)

Ultimately it does take two to tango, it was equally the fault of greedy people taking on more mortgage than they could afford thinking that house prices were magic and would keep going up forever(never mind the laws of supply and demand)

Of course the difference in how different the two are lies in what happened AFTER the bubble burst. The greedy joe schmoe lost all the money he put into his house, the greedy wall street bankers not only got bailed out(thus proving that rewards belong to the rich, consequences to the poor), has been making out like a bandit on the tax payers dime all the while still *complaining* about how taxes for him(not joe schmoe mind you, just him) are too high.

I would take the rich's bitching about taxes a little more seriously if they were not the first ones with their little grubby hands out looking for a handout after their own stupidity got them in trouble in the first place. Now I can understand Bush's reaction, he too was a trust fund kid who never learned that there were consequences to his actions as his daddy always bailed him out after one of his business ventures would inevitably fail, so you can understand why he would think the rich facing consequences is unfair. What I dont get is why Obama largely continued the program, only to get nailed by the same people who started the program because he was "spending too much" on the programs that Republicans started..... Obama you walked right into their trap.

Re:thanks for whoring quants (2)

Raenex (947668) | more than 3 years ago | (#37101556)

What I dont get is why Obama largely continued the program

Because Obama is an establishment politician. He's going to listen to the lobbyists and the people he put in charge, which came straight from the industry. He did what any other mainstream politician would have done, regardless of party.

Re:thanks for whoring quants (1)

nog_lorp (896553) | more than 3 years ago | (#37101992)

What I don't get is why everyone is surprised that every Republocrat to get into office continues the agendas of the Republocrat party. Every president since Lincoln has been one. The senate is currently 98% Republocrat, with the 2 other members caucusing with the Republocrats. The House of Representatives is 100% Republocrat.

Republocrats favor bigger government, more federal concentration of power, a bigger military industrial complex, and the strengthening and extension of property rights.

Re:thanks for whoring quants (3, Insightful)

nog_lorp (896553) | more than 3 years ago | (#37101650)

equally the fault of

Not how blame works. Google "blame is not a zero sum game". The influences (in part or wholly) responsible for any event are infinite, and so are the factors leading to those influences (i.e. it's not Goldman Sach's fault their parents didn't raise 'em right ;)

And if you really think people with no financial know-how who were misled by predatory lenders (with the responsibility of providing those people sound advice) are as responsible as those who carefully architected massive fraud, you must be a troll (intentionally or not).

Re:thanks for whoring quants (1)

Anonymous Coward | more than 3 years ago | (#37101986)

Equally at fault? No. At fault as well? Yes.

I know plenty of people who were gambling on the ability to flip their homes, or who bought a home that was really outside their means betting that when it went up in price by 25% or 1/3 again they'd be able to refinance, or folks that got loans that just didn't make any kind of sense...

There are people who were sold a bill of goods by their lenders, sure, though I'm not buying that it's nearly as many as people make it out to be. (Also, even those who feel they got duped have some responsibility. A house is about the most expensive thing a middle class person is likely to purchase. Some research before taking that plunge is warranted.)

I know plenty of people who worked their asses off to get into a home they knew they didn't want to pay for indefinitely looking for the middle class get rich by flipping scheme. When the market crashed their homes didn't all of a sudden become more expensive, they simply didn't want to keep paying for something that they owed more than it was worth, so a bunch of them defaulted on their loans even when they could've kept paying them.

most subprime mortgages were not for homes (1)

decora (1710862) | more than 3 years ago | (#37101876)

they were for house flipping and cash out refinancing.

and Synthetic CDOs are not based on mortgages, they are based on credit default swaps.

-reference

All the Devils are Here, Nocera and McLean

Re:thanks for whoring quants (1)

JanneM (7445) | more than 3 years ago | (#37101348)

They don't play with their own money. If you're putting your money into the market - directly or indirectly - then you're complicit. You could simply put your money in a savings account or in a safety deposit box after all. But no, you like the better returns over time. You're like a punter who sneers at his bookie as a lower class of person.

Put your money - including your pension benefits; they're among the largest actors in the market and known for not taking responsibility as stock owners - where your mouth is.

you put your career into the market? (1)

decora (1710862) | more than 3 years ago | (#37101894)

there are people with lots of savings and lots of education and lots of experienece who became unemployed, because of these games being played by others.

if they had 'put their money in the savings account', it wouldnt have helped them one iota when the economic system went into recession.

Re:you put your career into the market? (1)

JanneM (7445) | more than 3 years ago | (#37102184)

What I'm saying is, you can't blame the market actors without also blaming the people who give them the money to play with. Which are most of us, one way or another.

Re:thanks for whoring quants (4, Interesting)

tunapez (1161697) | more than 3 years ago | (#37101498)

The problem is that measures of uncertainty using the bell curve simply disregard the possibility of sharp jumps or discontinuities and, therefore, have no meaning or consequence. Using them is like focusing on the grass and missing out on the (gigantic) trees. In fact, while the occasional and unpredictable large deviations are rare, they cannot be dismissed as âoeoutliersâ because, cumulatively, their impact in the long term is so dramatic. [ft.com]

The Godfather tried to warn them. Don't know if I'm pleased or saddened that he lived long enough to see his incredible tools turned into "weapons of financial destruction". [Emphasis mine]

Luckily, he will be spared the repeat performance. Nothing's changed, they're still "printing money" every day. [emphasis theirs]

Re:thanks for whoring quants (1)

quarterbuck (1268694) | more than 3 years ago | (#37101768)

Thanks for the link. It is pretty spot on.
At the risk of being off topic.
But that said the latest crisis was not one of unexpectedly large standard deviations alone, but one of badly modeled correlations. The article is correct that the variance of a portfolio is larger than it looks, but many in the equity markets had figured that out. What happened in this recent crash was that they used scant data from mortgage markets to try and estimate correlations. For eg: Biggest possible loss for Californian mortgages was say 10%. Adjusting for a large variance, you could say that the chance of loss is say 50%. You could account for that in some way, say.
But what if someone bought a bond that would only default (not pay) if 40% of bonds in 20 states defaulted? That's where the correlation came in. They assumed in a rather complicated way that the chances of bonds defaulting are related to the correlations of bonds in different states. After all, a default is just a very large negative move.
Correlations between bonds in different states were pretty low because each state had varying economic conditions etc. So plug that into the model and you would find that the newfangled bond that would only default if 40% of bonds in all 20 states defaulted was very safe. So everyone called it a AAA.
Except it turned out that all the states were on a property bubble fueled by low interest rates and greed and had a correlation of 1 in bad times. Hence the mess we are in.
Anyway, what I am trying to say is that Fractal model might be very good at estimating variances , but still would not solve the problem of estimating covariances.

except that synthetic CDOs (1)

decora (1710862) | more than 3 years ago | (#37101840)

were based on credit default swaps, which are basically, gambling, and have no relationship to any actual cash flow.

and a lot of the mortgage securities were based on fraud, and the ratings agencies purposely did not even look into them to see what kind of loans they had (let alone what kind of credit default swaps they had... )

and the bankers payed them to rate this stuff very highly.

there are dozens of books about this. its fraud, not a 'mathematical mistake' or 'not understanding math'. the CDO desk bankers who made millions of bonuses on 'futurue projected profits' while they destroyed their own companies understood the math extremely well.

Re:thanks for whoring quants (1)

garyebickford (222422) | more than 3 years ago | (#37102230)

Highly recommended, these two books (get them as audiobooks if you want hours of driving amusement, education and horror). Just for perspective (one that is not in these books, or anywhere else that I know of - I thunk it up with my own little brain), this whole scenario can be seen as a classic tech bubble - the technology being the application of algorithms and various other forms of computer technology to technical stock trading. This bubble began back in the early 1970s, and happened to hit critical mass just when everything else was happening - the housing bubble, etc. Since this tech bubble lived in the second order space of the financial economy that sits on top of the first-order "real-world" economy, it got boosted out of sight by the multiplier of the two.

The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It [wikipedia.org]
In case /. gets a nickel if you actually buy a copy from Amazon by linking from here: The Quants [amazon.com]
- it all started with the guy who figured out how to make card counting work in Vegas and Atlantic City ...
and ...
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves [wikipedia.org]
Too Big to Fail [amazon.com]

ZeroMQ (1)

Anonymous Coward | more than 3 years ago | (#37100966)

Linux is extremely good at networking. Stick the LGPL zeromq [zeromq.org] library on top and you get low latency messaging middleware. Afaik this is also really popular in financial IT systems. People are doing 5M-8M messages per second with it.

Re:ZeroMQ (1)

JamesP (688957) | more than 3 years ago | (#37101244)

Second this

ZeroMQ is magic, and very easy to use.

Even better, use it to split loads between servers, processes, etc

Only downside I've seen is that some messages are still mysterious, so if you get a weird assert popping up, just google it (yeah, I know you would do it anyway)

Re:ZeroMQ (0)

Anonymous Coward | more than 3 years ago | (#37101276)

I've been looking for something like this recently with performance in mind and going by the examples, it is perfectly suited to my needs. Thank you very much!

Really? (1)

Anonymous Coward | more than 3 years ago | (#37100972)

Since when has Slashdot started to think that Wall Street has favored quality over price? Oh, that's right. This is Linux. I guess if it was about anything else a thousand fanbois would be screaming about kick backs and profit motives.

Re:Really? (4, Insightful)

Superken7 (893292) | more than 3 years ago | (#37101030)

Yeah, they must have chosen it because it was free, even though they cite the fact that it was the best solution to their needs because of the lower latencies compared to alternatives and because of its flexibility.

Since when do people like you bring a relevant argument to the table? Oh, that's right. You're an AC.

Re:Really? (0)

Anonymous Coward | more than 3 years ago | (#37101200)

Oh, that's right. You're an AC.

And a very poor AC at that, blowing all that hot air and all. :D

The Plan Worked .. now Take Down Wall Street! (1)

sakari (194257) | more than 3 years ago | (#37100980)

Quick, hackers! Start assimilating the Linux source code with invisible patches that take every 0.1% of every transaction running on Wall Street and donate that money to the poor countries!

Insert code to take down the whole corrupt ponzi scheme that those heartless bastards are running there! Now is our chance to strike back! Think about the possibilities here people!

;)

Re:The Plan Worked .. now Take Down Wall Street! (1)

martin-boundary (547041) | more than 3 years ago | (#37101130)

Shhh! It's already taken care of. The plan is to remove Linux kernel version numbers, so that the big shot Wall St IT managers get heart attacks from the incomplete number fields on their TPS reports...

Re:The Plan Worked .. now Take Down Wall Street! (0)

Anonymous Coward | more than 3 years ago | (#37102108)

If you think Wall St. doesn' t know how to fabricate numbers on reports, I have some bad news for you...

Customizable Kernel (4, Interesting)

Warlord88 (1065794) | more than 3 years ago | (#37100996)

As mentioned in the summary, linux allows the firms to modify the OS kernel to serve their purpose. For example, the performance of trading algorithms would considerably degrade if context switching is allowed. So you can modify the kernel so as to dedicate certain cores for the main algorithms to which the OS can pass a very limited number of signals.

I know for a fact that at least one bank employs this in their high frequency trading group and probably all of them do.

Re:Customizable Kernel (0)

Anonymous Coward | more than 3 years ago | (#37101122)

That would be an interesting and a not too hard a project, I am assuming. So this in turn would imply that there would already be an option in the kernel to do it right? So why not improve the performance of gaming or computation systems by recompiling the kernel to do this?

Re:Customizable Kernel (1)

Warlord88 (1065794) | more than 3 years ago | (#37101208)

This is purely my guesswork, but I think that the benefits would be marginal. An improvement of 1 fps might not be convincing for game devs to modify the kernel. However, if you can execute even a single trade before others do, and multiply it by the number of trades executed per second (which must be in millions), the profit margin would be non-trivial.

Re:Customizable Kernel (1)

blueg3 (192743) | more than 3 years ago | (#37101550)

Well-designed systems are already decently good at this. A typical system where this is a problem has a single high-demand process and a lot of low-demand processes. A good scheduler will dedicate the high-demand process to a core, with no context switches.

I don't know if it's easy to set processor affinity in Linux, but it's easy to set in Windows, with the net result that you can basically dedicate cores to individual threads.

Re:Customizable Kernel (3, Insightful)

Jah-Wren Ryel (80510) | more than 3 years ago | (#37102256)

That would be an interesting and a not too hard a project, I am assuming. So this in turn would imply that there would already be an option in the kernel to do it right? So why not improve the performance of gaming or computation systems by recompiling the kernel to do this?

I suspect they are using some form of real-time extensions [kernel.org] to the linux kernel. One thing they all share in common is little to no OS functionality is available to applications that are running real-time because, it is almost always the case that as soon as you ask the kernel to do something for you, all bets are off as to when it will get done or even when you will get scheduled back on to your cpu.

So, in order for a game to take advantage it would need to isolate out whatever parts of the code are performance and dead-line critical so they wouldn't need to interact with the OS. And then the user would have to install and boot a linux kernel with the real-time stuff turned out.

Also, FWIW, real-time is not about speeding up computation, it is about hitting your deadlines exactly when they need to be hit - not too soon, not too late. In many cases you trade off computational performance in exchange for the ability to meet those deadlines.

Oh, Linux, how you've forsaken us (5, Insightful)

RobinEggs (1453925) | more than 3 years ago | (#37101044)

This is the very last place I like seeing Linux.

The article is saying (obviously) that Linux is the chosen platform for high-frequency trading, i.e. algorithm-dominated trading that has everything to do with manipulating and responding to the market in nanosecond time frames for a quick buck and nothing to do with making stable, long-term investment decisions.

I'd rather see evidence of a Linux machine in Hitler's bunker than hear about Linux helping Wall Street punks get even further from real, useful activities than they used to be.

Re:Oh, Linux, how you've forsaken us (-1, Troll)

The Dawn Of Time (2115350) | more than 3 years ago | (#37101094)

Awww, that's such a cute way to oversimplify things to suit your own far-from-universal morals.

Re:Oh, Linux, how you've forsaken us (0)

The Dawn Of Time (2115350) | more than 3 years ago | (#37101274)

Aww and now the money-hating populists with mod points have buried me in their rash haste to silence opposition that proves they are far from objectively correct.

You poor idealists must hate the real world.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101532)

Boo hoo. Boooo hoooo. Boooooo hoooooo.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101304)

What good does high frequency trading do?

(Waiting for an answer, I propose we all gather around this defender of the nanosecond traders and collect saliva in our mouths. I expect it might soon come in real handy.)

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101144)

No shit.

All high speed trading does is suck the wealth away from the people who actually produce it.

Re:Oh, Linux, how you've forsaken us (1)

Hatta (162192) | more than 3 years ago | (#37101156)

Linux is a powerful tool. As such it can be used for good or evil. It's not the tool's fault if it's used for evil.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101228)

Everything in finance is high speed. Day to day human trading has to happen at nanosecond speeds too. This isn't about algorithmic trading in particular.

Re:Oh, Linux, how you've forsaken us (1)

diamondmagic (877411) | more than 3 years ago | (#37101300)

When you buy low and sell high, that stabilizes prices. Since High Frequencies Traders are profitable, they therefore contribute to the stability of the market. And in fact, the bid-ask spread has in fact closed significantly as a result. Speculators and arbitrageurs are no different, so long as they're profitable. (And if you're not profitable, it's not long before you fall out of the market anyways, there's no need to police it.)

Re:Oh, Linux, how you've forsaken us (2)

vux984 (928602) | more than 3 years ago | (#37101452)

I can't tell if your being sarcastic. I hope so, because otherwise what you wrote was idiotic. Not only does it not make sense, but the argument itself isn't even logical.

Bottom line is that any profit extracted by HFT is at the expense of the real buyers and sellers of the underlying stocks.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101538)

I wouldn't argue that HFT stabilize markets, but your statement is the idiotic one. All HFT does is take advantage of arbitrage opportunities that a human is too slow for.

Re:Oh, Linux, how you've forsaken us (4, Insightful)

vux984 (928602) | more than 3 years ago | (#37101790)

All HFT does is take advantage of arbitrage opportunities that a human is too slow for.

Exactly right but think about that for just half a second.

Who was benefitting from the fact that the arbitrage opportunity was not exploited? In each case it was the buyer or seller.

So the "profit" the HFT takes, is taken directly from the buyer or seller in each transaction.

Everytime I place a buy order, without HFT, i might have got the shares for a few cents less. Everytime I place a sell order, without HFT, I might have gotten a few cents more for the shares.

"HFT takes advantage of arbitrate opportunities that a human is too slow for" ... meaning my transactions would have closed without the "liquidity" HFT provided within seconds.

So how do you reach any conclusion other than "HFT" is leeching profits from the actual buyer and seller, while providing nothing of value?

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101594)

I can't tell if your being sarcastic. I hope so, because otherwise what you wrote was idiotic. Not only does it not make sense, but the argument itself isn't even logical.

Bottom line is that any profit extracted by HFT is at the expense of the real buyers and sellers of the underlying stocks.

Actually he's absolutely right. Spreads have narrowed greatly, which helps the long term investors that the slashdot hft haters love so much.

Re:Oh, Linux, how you've forsaken us (0)

diamondmagic (877411) | more than 3 years ago | (#37101608)

Someone is going to make the money, yes. So while people are making money, would you rather have volatile markets with wide spreads, or more stable prices, with a highly liquid, small bid-ask spread? It's a no-brainer, I think. Arguing against new technology just because horse and buggy companies are going to go out of business is no sound argument at all.

Re:Oh, Linux, how you've forsaken us (2)

vux984 (928602) | more than 3 years ago | (#37101728)

would you rather have volatile markets with wide spreads, or more stable prices, with a highly liquid, small bid-ask spread

The stock market wasn't more volatile 20 years ago.
Liquidity wasn't a "problem" that needed to be solved either.

The markets of 75 years ago benefitted significantly with the march of technology, but HFT hasn't made a good thing better.

Arguing against new technology just because horse and buggy companies are going to go out of business is no sound argument at all.

And how is that relevant? Who are the metaphorical horse and buggy companies here? Computerized trading systems make perfects sense. Internet connecting the buyers and sellers the world over so they can instantly and effortlessly trade is what reduced the spread, and added a significant and APPROPRIATE level of liquidity.

Letting the HFT group leech MY profits to the tune of a factional cent so that trades could uccur at a fraction of a micro second faster with a fraction of cent less volatility is of no value whatsoever to the actual investors like me.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101824)

Many (most?) HFT do not place many aggressive orders; instead they place passive (limit) orders. Such orders don't drive price movements but to the contrary they dampen volatility. In normal times, they also provide more liquidity (and in abnormal times, when they go away, the complaint seems to be: wah! we need you! you should not be allowed to go away!).

Dampened volatility is why weeks such as the last are the exception rather than the rule. Better liquidity means:
      - you can get your order executed "now" (this very second - or even quicker) without paying a punitive price for immediacy
      - you can place larger orders without moving the price against you as much.

And for providing these real benefits, HFT and market-makers gain a small per-share profit (typical would 20c per 100 shares, so perhaps 20c per $5000 transacted.) I don't have numbers, but I would bet real HFT profits are basically invisible in relation to e.g. total broker commissions. It's not going to be noticeable to you unless you are a very very active day trader, and probably not even then.

These benefits are clearly great and worth paying for if you are a hedge fund (*). Some communists suggest that an individual investor finally cashing in some retirement-fund stocks after 40 year's work and saving should not be that fussed if it takes 100ms to execute his sell order. Well, tough. You'll pay that premium for immediacy whether you like it or not. The market cannot cater to every bizarre individual preference. (And not caring whether it takes a minute or more for your trade to go through - even if you were to get a better price for waiting: there's no denying that this is beyond idiosyncratic but borderline insane)

(*) Yes, it's true HFT would make Hedge funds' life better and they would gladly give up the small profit for their benefits. But Wall Street has created "dark pools" for these funds, which are _even better_ suited to their trading style, so my argument is a bit hypothetical. Though still correct, in theory :-)
 

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101598)

Assuming no fraud. But since HFT is pretty much impossible to analyze afterwards, it is a safe bet that a large part of it is fraud.

Why is it hard to analyze? 1) Overwhelming volume, 2) Difficult to unthread timing, 3) adaptive algos for which no one can be held personally responsible (i.e. culpable).

For example, imagine a community of algos that collude by preceding every buy with a certain pattern of probes. Without knowing the coded pattern, you could not foresee the trades. All participants are front-running. Is it possible? Unless the answer is that it is theoretically impossible, then it is just a matter of time, and is probably already happening. I suspect there are man other more obscure schemes that highly motivated, highly talented people can contrive without much risk of the SEC figuring it out.

Capital gains tax should scale inversely with asset ownership time, starting with 99% at 1 microsecond, and dropping to zero at 5 or 10 years.

Re:Oh, Linux, how you've forsaken us (4, Insightful)

I(rispee_I(reme (310391) | more than 3 years ago | (#37101896)

When you buy low and sell high, that stabilizes prices. Since High Frequencies Traders are profitable, they therefore contribute to the stability of the market.

This is exactly the fairytale middlemen tell themselves so they can sleep at night after making ludicrous amounts of money for producing nothing of value.
Their only goal in life is not to the the last person holding the bag or the bottom tier of the pyramid. That's why latency is so important, and that's why the "free market" is a myth- as long as your latency is higher than someone closer to the exchange, there can be no level playing field.

I've thought about this at some length, and barring "spooky action at a distance" to negate the effects of latency, two ideas commend themselves to me:

1) A fixed interval of latency imposed on all trades that is much larger than the maximum latency differential. This seems like it might help things, but it also seems like sweeping the problem under the rug- there would still be some advantage to lower latency in trades, after all. The "high frequency trades" would just occur as close to that fixed interval as possible.

2) An alternate currency used to pay those whose "profitable" actions can be repeated arbitrarily in a given interval. It takes no more effort to sell a million shares short than a billion, but (for example) an ear of corn cannot be multiplied effortlessly in a given interval. It seems to me that by paying the middlemen (who do not produce anything of real value) in the same coin as the farmer (who does), the farmer's money is devalued. Let me anticipate the "the middlemen would simply exchange their currency for the farmer's currency" reply by saying that in doing so, they would empower the farmer. After all, his currency is scarce, and the middlemens' currency is not.

I'm sure I'm an imbecile who doesn't understand the subtleties of Wall Street, but then again, evidence seems to suggest that so is everyone else.

Re:Oh, Linux, how you've forsaken us (1)

spacemky (236551) | more than 3 years ago | (#37101346)

I like your conclusion about wall street fat cats using linux to manipulate the market, but to blame Linux is overshooting it. This is like blaming murders on handgun ownership. Just because someone uses a tool for evil doesn't make the tool itself evil.

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101430)

The headline was just a random attention grabber. I have no illusion that Linux has intent or does anything beyond what people tell it to do. I'm actually sort of bewildered that I have to explain this; did you really think I considered Linux a deliberately evil thing, either by design or by sentience?

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101468)

I read comments like this, and it dissuades me from going into finance once I finish grad school. I am listening to you.

Re:Oh, Linux, how you've forsaken us (4, Insightful)

couchslug (175151) | more than 3 years ago | (#37101958)

Freedom doesn't mean "just freedoms you approve of".

The best quote on the subject is from the OpenBSD camp:

"But software which OpenBSD uses and redistributes must be free to all (be they people or companies), for any purpose they wish to use it, including modification, use, peeing on, or even integration into baby mulching machines or atomic bombs to be dropped on Australia."
Theo de Raadt
      cvs@openbsd.org mailing list, May 29, 2001

Re:Oh, Linux, how you've forsaken us (0)

Anonymous Coward | more than 3 years ago | (#37101972)

The nature of open source is that by changing "I saw, I came, I conquered" to "I cloned/forked" the bad guy doesn't look any worse off than before benefitting from the tool's power. The police isn't going to stop them because they weren't stopping them prior to swiping the tool from our somewhat biased showrooms.

I worked in the financial sector two years and had just assumed that the usage of Unix / Linux at the exchanges (with one of the west European markets officially switching to it a year ago) is common knowledge to traders; let alone slashdot-refreshing slashdotters. Today's reactions here taught me that we all live in fog-of-war bubbles, having subtle gaps of knowledge in what is "news" beyond our day-to-day professional environments and slashdot itself.

Accuracy ? (3, Informative)

Alain Williams (2972) | more than 3 years ago | (#37101132)

As late as 2007, Wall Street exchanges were still largely run on Unix, such as HP's AIX and Sun Microsystems' Solaris

I don't think that IBM will be pleased to be told that HP produced AIX!

Re:Accuracy ? (2)

Osgeld (1900440) | more than 3 years ago | (#37101218)

I always thought hp unix's name was a vomit sound ...

Pure Greed! (2)

AlphaZeta (1356887) | more than 3 years ago | (#37101316)

It's sad to see how much money Wall Street firms were able to generate using this open source platform. We have yet to see what the open source communities get from these welches!

Wall Street (2)

br00tus (528477) | more than 3 years ago | (#37101318)

Development and administration at Fortune 100 companies in Manhattan is different than any other place I encountered, including other large companies. There is a lot of message-oriented middleware to patch together different systems.

You'd see a lot of strange stuff - a batch job printing from an IBM mainframe would be routed to the Unix print server, and be sent off to a junky old printer in some foreign country. Not always easy to debug when there is a problem.

Where I was, there were a ton of these old programs written in FORTRAN, COBOL and whatnot which had had business logic put in them for decades sitting on these modern IBM mainframes. Some of the business logic within it was probably lost long ago, it all just "worked", with a lot of the output routed to more modern equipment and technology. I guess they figure if anything ever goes wrong, they have almost unlimited money to throw at the problem so they don't worry about it.

You also have things happen. A business group has their developers write some program, it goes production on a machine or two, and then for whatever reason it generates a lot of money. Suddenly you have millions, sometimes even billions of dollars going over one production machine in a day. Everything happens so fast that it was never planned out to be scalable, and the main developer is too busy tweaking the program to make it make more money than to be scalable etc. If you're lucky, its market is closed during the week and you get to work on adding in additional levels of redundancy to the machine which suddenly has billions flowing through it every day. Despite the lack of planning, you better bet people will be flipping out if the machine goes down during the day, and the traders hear that their trades aren't going through due to "computer problems".

At the Fortune 100 financial I was at, Windows was considered a joke. Even the local head of the Windows team admitted that the Unix side was where things were really happening. It was just more flexible, focused on high availability and so on. With Linux coming in so much on the Unix side, that flexibility has only increased. I'm sure whatever RHEL or SUSE edition being run on most servers is so heavily modified internally by the various companies internal engineering teams, that it doesn't look like a RHEL or SUSE anyone here has ever seen. And RHEL and SUSE bend over backwards to get the business - which can be on tens of thousands, even hundreds of thousands of machines around the world.

It's better than the Oracle / Sun nightmare (0)

Anonymous Coward | more than 3 years ago | (#37101428)

I work for a major telco and we use Linux for almost all of our production equipment. In the early days, I thought I would have trouble with the concept of using Linux, but when I began investigating and found the major stock exchanges and many other major stock brokers were already using Linux, it made the job of convincing management a whole lot easier. Since Oracle has swallowed up Sun and their support has gone down hill, having two production systems recently trashed by incompetent engineers (one who couldn't even change a failed mirror disk without wrecking the whole system), has made us all the more determined. I am looking forward to a 100% Linux environment. It simplifies training and support too.

This is flash trading (1)

Billly Gates (198444) | more than 3 years ago | (#37101472)

Not Wall Street or finance.

Linux isn't their Master (1)

subreality (157447) | more than 3 years ago | (#37101530)

They're still the master. Linux is their eager little pet, far more willing to learn new tricks than their old pet Solaris.

Set the exchanges to a clock. (5, Insightful)

inhuman_4 (1294516) | more than 3 years ago | (#37101656)

This high frequency trading is stupid. Everyone knows that it is a scam that is just making the markets more unstable. Yet no one does anything about it. IMHO the markets should have a clock speed like a CPU. All of the trades enter a queue and the queue gets executed once a second. This would limit each trading day to X number of ticks per day. This would go a long way to removing high frequency crap from the system. Of course people will then try to improve short term predictions rather than long term like they should. But it would be a step in the right direction.

Re:Set the exchanges to a clock. (1)

Anonymous Coward | more than 3 years ago | (#37101780)

It's not going to solve anything. You'd just move the race to be the first guy to get his order in at the start of a new second, or the last guy to cancel his order before the end of the second. Speed will always be an advantage.

Re:Set the exchanges to a clock. (2)

Zenin (266666) | more than 3 years ago | (#37101912)

So you make speed a disadvantage:

0.5% transaction fee on any and all trades, payable by the seller. No "short term" vs "long term" math to game, just a flat fee on the gross amount of any transaction of any kind.

It wouldn't affect real, long-term investment negatively at all; In fact it'd encourage stability by discouraging caching out (you take a 0.5% hit the moment you sell, even if you are taking a net loss, so it's in your best interest to hold for the long term).

It would however, completely destroy the "business model" scam of high-frequency trading that only exists to leech money off of real investors by making every real seller get a bit less and every real buyer pay a bit more. The only way the scam works is if transactions are effectively free.

---

At the same time the entire elitist concept of separate "capital gains" tax rates being distinct from "earned income" must be abolished completely. What the income tax system used is (progressive, flat tax, whatever), there is no legitimate reason on the face of God's green earth that makes one man's $10 bill any more special then another man's $10 bill.... If anything the person that actually worked for their $10 is far more deserving of a break then the person who sat on their fat ass doing nothing while $10 magically appeared in their account as "capital gains".

Re:Set the exchanges to a clock. (0)

Anonymous Coward | more than 3 years ago | (#37102110)

I think the lower capital gains taxes are there to encourage investment into businesses/economy/society. Whether the government should be using tax policy to further social agendas is probably a question for an economist.

The transaction tax might work. Not sure what unintended effects it might have though.

Re:Set the exchanges to a clock. (1)

danhaas (891773) | more than 3 years ago | (#37102002)

After the order is given, no one can remove it. Shuffle the stack.

No one needs liquidity better than one second for real business.

Re:Set the exchanges to a clock. (1)

Fentekreel (634892) | more than 3 years ago | (#37101920)

That really solves nothing, moving it to a queue like state, as well limiting the ability to trade would defeat the purpose of trading stocks, as it would limit the ability to move them around thus cutting profit the backbone of greed. :)

Re:Set the exchanges to a clock. (1)

martin-boundary (547041) | more than 3 years ago | (#37102074)

A market speed limit is like friction. Sometimes, friction is good. Like in winter, when the sidewalk is slippery.

When the markets don't have enough friction, the money sloshes in and out of investments too quickly, and that makes it difficult for the people who want to use the money to build real things. Today, you have a million to spend on a new business project, tomorrow the million is no longer available and your project is canceled. All because investors changed their mind overnight and the stock tanked.

Friction in the markets is good, and it can only be achieved by slowing down time, and by making transactions more expensive - via fees and taxes.

Re:Set the exchanges to a clock. (0)

Anonymous Coward | more than 3 years ago | (#37102146)

This high frequency trading is stupid. Everyone knows that it is a scam that is just making the markets more unstable. Yet no one does anything about it. IMHO the markets should have a clock speed like a CPU. All of the trades enter a queue and the queue gets executed once a second. This would limit each trading day to X number of ticks per day. This would go a long way to removing high frequency crap from the system. Of course people will then try to improve short term predictions rather than long term like they should. But it would be a step in the right direction.

But wouldn't a system with lower latency still have an advantage of getting into the queue more quickly (and therefore occupying more spots in the queue)?

The clock would just set a maximum daily volume which would probably swing prices more dramatically (because HFT does indeed smooth out those short term fluctuations).

Don't get me wrong, these guys put a coin in their pocket by cutting in before your trade, but we're talking about fractions of a cent. And they provide more liquidity while doing it. I don't love that they take 0.0095 cents from me, but I think one could make a decent argument that the added liquidity they provide can ultimately get me better pricing than I would otherwise.

It's easier nowadays to buy or sell a small company because of the volume created by HFT. So in a way we're just paying a cheap price to someone that provides you with a service that gives you more choice in the marketplace. Not really so bad when you think about it.

Re:Set the exchanges to a clock. (0)

Anonymous Coward | more than 3 years ago | (#37102258)

This high frequency trading is stupid.

Here we go...

Everyone knows that it is a scam that is just making the markets more unstable.

And by "everyone" you mean...? Oh, you mean the usual Slashdot commenters who whinge about HFT?

Yet no one does anything about it. IMHO the markets should have a clock speed like a CPU. All of the trades enter a queue and the queue gets executed once a second. This would limit each trading day to X number of ticks per day. This would go a long way to removing high frequency crap from the system.

Can't see any prob...no wait...

Of course people will then try to improve short term predictions rather than long term like they should.

Bingo!

But it would be a step in the right direction.

No.
What makes you people think you're qualified to try and "fix" this "problem"?

and Java on the software side? (1)

Lawrence_Bird (67278) | more than 3 years ago | (#37101678)

well that seems retarded if you are so interested in speed. And I would think any of the *bsd's would perform just as well as linux and might be more secure too.

Everybody forgets how it was before (0)

Anonymous Coward | more than 3 years ago | (#37101938)

Maybe I'm old school, but I remember investing in the early part of the dot-com bubble. Making a trade cost $200 - $400 in commission, not including the fact that the spread was 1/8 (12.5 cents) wide. So I don't mind these guys getting me $7.95 trades with a penny spread. One way, somebody on wall street is going to take a cut. Whether it's the specialist, market maker, or brokerage, retail investors always get screwed a little. At least now it's a lot less than I used to get screwed for.

Mod up pls (1)

benjamindees (441808) | more than 3 years ago | (#37102278)

That's exactly right. Linux and Wall St. are actually very similar in this regard. Someone is going to make money providing support regardless, because there is a market for it. Either you accept a monopoly (or an oligopoly), and prices eternally rise. Or you embrace the free market, and prices fall as innovation and competition improve quality. Complaining that someone makes money using algorithmic trading is like complaining that RedHat sells free software for $400 a seat.

Faster, better, cheaper? (1)

kmdrtako (1971832) | more than 3 years ago | (#37102132)

What occurs to me is that 15-20 years ago, when Sun iron dominated Wall Street, is that all the Sparcstations came IIRC with 10baseT on the motherboard, and I don't recall there being faster NICs available. And even if there were, in a lot of cases all the machines slots were populated with graphics cards.

Then three things all sort of happened around the same time: Linux (kernel and user land) reached a level of maturity and stability, inexpensive 100baseT and later 1000baseT NICs became available, and Intel closed the CISC/RISC performance gap. I don't know when Sun started shipping faster networking, but if the only way to get it was to buy a whole new machine, as opposed to plugging in a $30 NIC, it isn't hard to imagine which way the purchasing decision would go, even for money-is-no-object Wall Street.

No surprise then that Linux whupped Solaris' butt. Sun didn't help things by dawdling on fixing known Solaris performance problems. By the time Sun fixed them it was too late; Linux had already gained a foothold.

Yes, we are heavily linux (4, Informative)

proud american (1003577) | more than 3 years ago | (#37102178)

I work at a major wall street bank. We used to be heavily Sparc/Solaris/C++. Over time the Intel platforms became much faster and much cheaper than the Sparc ones. There was some early concerns about reliability but it was not warranted. The boxes are so fast now we are almost exclusively using virtual linux boxes too.

We are doing a lot of Java these days. The JVM's are much improved. It is very easy to write large heavily multithreaded Java apps to replace the our large C++ distributed systems. The Java development, build, debug, and deployment tools are great.

One can spend time arguing the merits of C++ vs Java. The reality is in most cases the C++ development time is slower, and the coding patterns used do not produce code that is faster than Java. C++ development and deployment across different platforms is a pain.

Nothing to brag about. (1)

Beelzebud (1361137) | more than 3 years ago | (#37102204)

Hey look, we made it possible for the already wealthy to have an unfair advantage over those without the money for supercomputers and millisecond trading!
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