If you love endless optimization and squeezing every last bit of performance out of software and hardware you’d love being an engineer in the high-frequency trade industry. I wouldn’t be surprised if someday high-frequency traders even discovered a way to send information at faster than light speeds. Can you imagine the implications? So much profit.
Plenty of science fiction FTL is based on some [made up] loop hole that you can travel faster than light while time itself goes forward for all observers at the normal rate.
Since we are talking about science fiction here you cannot ignore the above loop holes. If we were talking about the real universe as we know it, then of course you are right.
Second - I'm not sure high frequency trading adds much to the world itself. But, have the algorithms or technology they develop been taken and used elsewhere? Maybe without them, this kind of cable development would not have happened as quickly? Maybe it creates an increase demand for higher-level STEM degrees given the draw of earnings potential (and not all would make it, meaning some STEMs go on to work on actually valuable things for society?). It's interesting to think about.
>Lumenisity, the startup backed by Jump, is betting that hollow-core fiber will find uses beyond trading, for instance in telecommunications and 5G networks. “We see HFT as an early adopter for the use of hollow-core,” Lumenisity Executive Chairman David Parker said in an interview. He declined to comment on his firm’s relationship with Jump.
>Supporters say hollow-core fiber could be used for high-bandwidth links in places like northern New Jersey where the NYSE and Nasdaq have their data centers, or even under the Atlantic, connecting London and New York, if the technology gets good enough.
It is very valuable, but often misunderstood. Without high-frequency trades building market liquidity, there would be a massive gulf between bid ask spreads that ultimately loses people money in the long run.
I also think that getting rid of large arbitration opportunities as soon as possible is good for markets, as they behave “nearer” the ideal no-arbitration model.
And what is the big-picture economic difference between getting rid of arbitrage opportunities with a millisecond (in the old times) or within a nanosecond? Because that's what we are talking about, not about inefficiencies remaining for hours.
AIUI, you think that HFT has driven various numbers far down, the rest of us benefit from them being driven down, but don't benefit significantly from them being driven as far down as HFT actually has done. Right? I can agree with that.
The hidden assumption is that if HFT hadn't done that, then something else would have come along to drive those numbers down, but not as far. If so, then the benefit to the rest of us would have been much the same as it actually is.
You may be right, but I don't see what that "something else" could be. It would have to be something where some actor benefits from quick reaction and low spread, right? AFAICT, that must be either HFT or something indistinguishable from HFT. Something with the same traits, blamed by the same people for the same reasons.
You can impose a floor beyond which lower latencies no longer provide an advantage by replacing the current continuous auction market with a periodic, blind auction.
That is, have a market where orders accummulate in the order book and every, say, 15 seconds, the order book is crossed and trades are made.
You can do a lot of things with norms and regulations but, in the end, why not let the market organize itself? Also, timing (as per your example) is very very very difficult to keep exactly.
On the other hand, I think a kind of relation between prize of an operation and its energetic cost would be beneficial (like ---as an example--- forcing an operation to compute a hash of proportional difficulty, or whatever). But this is a different problem.
A free market solution doesn't really work when it comes to exchanges, as they are natural monopolies. You've had some attempts from newcomers to break into the space, but with extremely limited success.
Actually prior to governmental action the markets were quite fragmented. In the 70s in response to securities law they started consolidating. Then in response to further law they started fragmenting again in the 2000s.
I’m not largely a free market is the only solution person but this is a very bad example of ‘natural’ monopolies.
It makes sense all things being equal, but that isn’t the case.
Even in the old consolidated system you had differentiation between the exchanges in the form of exchange rules which led to Nasdaq specializing in different listings than NYSE.
If you look at the commodities exchanges they were even more specialized and splintered until legal interventions made those specializations less valuable.
It was governmental intervention that made liquidity the only factor in exchange choice.
You are talking about a relatively "new" concept, called Frequent Batch Auction, or Periodic Auction[0].
I remember first hearing about these ideas in the mid-noughties (around 2004..2007), but then again, I was in a technical university with an economics department. The FCA link refers to a paper from 2013, so by that time the topic should have been pretty well researched.
Yes, so you can, at least if you explain persuasively that this is better than the status quo. Without considering it carefully, it seems to be tilted towards whover has the lowest latency, except that in this scheme what matters is being able to get your offers in last before the deadline, based on the latest information from other exchanges.
A sibling comment links to the research, if you're interested in knowing more, but there are ways of making latency matter less. E.g. with a blind auction, if you hide the order book as it's being built (so you get no indication of built up demand), you can considerably reduce the impact of low latency
Imagine a market that traded every hour. So everyone lined up their orders and what they were selling and at the top of the hour all the trades were processed. Now imagine this on 9/11, or a fed release. Prices from an hour ago are just really not enough information to understand what the prices should be at now, so it ends up being very confusing (and not to mention bursty!). You could put in an order only to realize your price was too low, and you don't get filled, and have to wait another whole hour! Tons of inefficiencies there.
Those same inefficiencies in the market would be seen at 59 minutes, at 30 minutes, at 10 minutes, but get less and less impactful each time. HFTs basically provide a service that gives you almost instant liquidity and market making, which is valuable to anyone who's looking to act quickly buying or selling.
Lower spreads are good for people who aren’t price sensitive but are getting in or out of positions for other reasons than market microstructure.
This is largely everyone. If you need to rebalance your portfolio into more cash, say because you are paying for college, the lower the spread the lower your transaction cost.
I wonder what the amount of money made by HFT taking advantage of "natural arbitrage opportunities" is, and how it compares to HFT as pure front running of known orders? My guess is ~0 vs ~lots.
If it was so, they wouldn't be losing money, closing the shop.
Quite a number of them went under. So even such clearest cut front-running is not a fool proof strategy with "money out of thin air."
Seeing somebody saying "give me money, and I will multiply them with some magic mumbo jumbo" they themselves don't seem to understand, if the most usual investment industry hot air.
The big natural arbitrage opportunity is other people's coarse-grained price changes. HFTs make finer-grained changes at shorter intervals, and so win trades that the exchange directs to the best offer.
If being a market maker is profitable, then this profit derives from executing trades. Because the exchange directs trade to the best offer, the profit goes to whoever offers the best price, which is whoever adjusts its offer prices quickest. That's the recipe for HFT.
Lower spread is the difference between the price you can buy vs sell at. Most people do not trade stock directly - they use a middleman, called a market maker.
This is computer now, but back in 1890 (picking a date where there were stock markets, but obviously no computers) there were people who worked on the floor of the various stock exchanges called market makers. They own a bunch off shares of one company, and agree to buy or sell to anyone. When some broker (ie agent for a trader who may not live in the same city) walks on the floor wanting to buy stock they don't have to wait for someone else walking on willing to sell, instead they go to this person who is always willing to sell stock. Latter when broker (again agent for a trader) wants sell stock the market maker will buy their shares. This is much quicker than the two traders needing to find each other and agree to a price.
The market maker makes money be the spread. When the two traders above buy or sell with the trader they don't get the same price. Instead if the stock is listed for $10/share the person buying is really paying an extra price, $11/share (for example it is almost always pennies), and the person selling actually is getting $9/share (again an absurd example). The market marker is thus making $1/share for every share of stock traded.
The spread thus clearly is taking money from the traders. This is above the money you have to pay your broker to make the trade for you.
Actually I think it is not true. What is happening is that firms who can afford are investing in not necessary technology to be executed faster then others. That just creates a huge market barrier and a monopoly. Only the trading firms and in some way exchanges are creating value of it. For the normal user it doesn't matter if spreads or the orderbook is updated in a nano or microsecond.
For comparison, before the "internet", here were minimum $50 and $100 commissions on stock buys. 2%-3% buy-sell spreads were common. HFT is critical to allow each paper to be traded in multiple competing venues. etc etc
You are incorrect. Market-makers who take the other side of trades and warehouse risk for minutes or hours create liqidity (for minutes or hours). And yes, some algo traders are market makers and thus have social utility.
HFT who play market-maker for a microsecond do not create liqidity and have no value for society. Well, strictly speaking they create liquidity for the first 100-share lot of trades that a real-money market participant needs to do, and act as costly parasites for the other hundred or thousands lots that they need to do.
As someone in the industry and in that particular area, it seems like its you who are mistaken.
Anyone whose a market maker is playing in the HFT space, otherwise you can't cancel fast enough when the market moves otherwise.
Other uses of HFT are interlisted arb that keeps companies that trade in multiple countries at the appropriate non arbitrage price.
Or even inter market arb that keeps prices on each exchange in the US at a non arbitrage price.
I mean the entire currency market is kept in sync due to HFT.
They also do ETF arb that keeps ETF prices at, you guess it, their non arbitrage price.
These are all things that were done very poorly before HFT, and well computerization in general of the market.
The one thing I find when making these comments is people keep moving the goal posts.
Remember:
At one point HFT was being able to trade multiple times a minute with a computer. That was HFT at a time in the 80s.
Then being able to trade a a second level to keep exchange prices in sync, that was at one time HFT level speed. That was HFT in the 90s.
People now take that HFT behaviour for granted and try to move the goal posts to micro second timing forgetting that the above are all hft activities, its just that many more people can do them now.
HFT has undeniably shrunk spreads and decreased what the average person pays to buy the market.
Because HFT would naturally operate over already high-liquidity papers. There's no point in HFTing low-volume stocks.
Also not all HFT needs to rely on having the fastest transaction speeds. So, yeah, sure, having another buyer/seller does increase liquidity, but TSLA is liquid enough without it.
HFT firms make the market. That is they place orders in the market that form the bid/ask spread. So I'll be an HFT and market make quoting $90 bid, $100 ask for S&P500. This means if you were to buy 1 lot and sell 1 lot it'd cost you $10 (you bought at 100 and sold again at 90). The reason I have a spread between bid and ask is because I'm taking a risk that someone will take me up on the offer, the market will move against me and I'll lose money. Now, I install a much faster connection to the exchange, which means I can respond to market events faster, and so if the market moves against me I can move my position or cancel my orders or I can buy a hedge much quicker. So the risk of losing money is lower, so now I can quote $94 bid, $96 ask. By quoting tighter I can beat my competitors and more people will trade against me. So now you can buy 1 lot, sell 1 lot and it'll cost you $2.
So the better these HFT firms are, the less it costs you to get in and out of the positions you want.
A HFT typically has a given stock of Siemens and offers to buy and sell. Suppose one has 100 shares and offers to buy and sell two, you want to buy forty. You'll get two, and the HFT will put two more on the market, at slightly higher prices, and wait to see whether you buy.
How much higher/lower? Obviously they'd like to raise the price quickly to the highest price you'll pay, without raising it so high that you buy from someone else, and equally obviously you don't tell them what price that is. Will the HFT firm's software have better heuristics than your broker's?
Why do they get to make the market and you don't? Why do they have the power to set this spread? Wouldn't you also want to e.g. buy $90 and ask $100 to mitigate your own risk? Where does the asymmetry come from?
Absolutely nothing prevents you from making a market right now and it’s cheaper than it’s ever been. Download Robinhood. Fund your account. Buy a share. Put a limit order to sell it at one price and a buy order at another lower price. Congrats, you’ve made a market.
A few things instantly come to mind. Bid/ask spreads jump significantly because of the decrease in liquidity. This has a ton of weird downstream effects as the "market" prices are less efficient and more risky. You also lose all the money that's driving technological advancements (like that fiber cable).
You can think of HFTs as market makers, liquidity providers, and automated price discovery. For their services, they end up being able to slice a penny off the top of a lot of orders.
I admit I don't know much about this field (hence my question) so I will take your word for it. What sort of magnitude of problem are we talking about for the downstream effects?
>You also lose all the money that's driving technological advancements (like that fiber cable).
Isn't this circular? If they weren't capturing wealth created by other actors, they tautologically wouldn't have it to invest in the first place. That said, it's true that the money might not then be invested in this sort of technology.
So I'm not an expert either, but financial books are some of my favorite. I think the easy take away is that the bid ask spread is the transaction cost. If you can buy and sell a stock for the same price (minus price movements), it's very efficient to move your money in and out of different assets.
With the bid-ask spread being wider, that adds a transaction cost to every trade, as you can't sell for the price you just bought. This means that trades are more expensive and riskier. HFT provides liquidity that reduces those risks.
HFT seems to me to be one of those words that means two different things and people select the version of HFT that fits their arguments. "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. "Good" HFT is a market maker with tons of info who just gets there first every time because they're FAST.
You can see how the amount of info HFT turns it "good" or "bad", and that's a tightly held trade secret for most of the trading firms, so it's a grey area.
> "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction.
Routers with fpga/asic cards, very precise data center clocks, backhaul between Chicago/New Jersey & London/Frankfurt are all areas where HFT investments have made it to other commodity technology businesses.
Very cool. But I imagine these would be impossible to repair, wouldn’t they? So this could really only be used for short expanses or in places where replacing broken cables is trivial or worth the expense.
>“When you’re sending light into a solid fiber, it’s like you’re sending it through a window 50 miles thick,” said Dave Gustafson, a former head of wireless engineering at Jump. “With hollow-core, you’re sending it through 50 miles of air.”
59 comments
[ 617 ms ] story [ 1350 ms ] thread“The first to break c gets infinite profit! Ready, set go!”
Since we are talking about science fiction here you cannot ignore the above loop holes. If we were talking about the real universe as we know it, then of course you are right.
Second - I'm not sure high frequency trading adds much to the world itself. But, have the algorithms or technology they develop been taken and used elsewhere? Maybe without them, this kind of cable development would not have happened as quickly? Maybe it creates an increase demand for higher-level STEM degrees given the draw of earnings potential (and not all would make it, meaning some STEMs go on to work on actually valuable things for society?). It's interesting to think about.
>Lumenisity, the startup backed by Jump, is betting that hollow-core fiber will find uses beyond trading, for instance in telecommunications and 5G networks. “We see HFT as an early adopter for the use of hollow-core,” Lumenisity Executive Chairman David Parker said in an interview. He declined to comment on his firm’s relationship with Jump.
>Supporters say hollow-core fiber could be used for high-bandwidth links in places like northern New Jersey where the NYSE and Nasdaq have their data centers, or even under the Atlantic, connecting London and New York, if the technology gets good enough.
I also think that getting rid of large arbitration opportunities as soon as possible is good for markets, as they behave “nearer” the ideal no-arbitration model.
But that is just my opinion.
AIUI, you think that HFT has driven various numbers far down, the rest of us benefit from them being driven down, but don't benefit significantly from them being driven as far down as HFT actually has done. Right? I can agree with that.
The hidden assumption is that if HFT hadn't done that, then something else would have come along to drive those numbers down, but not as far. If so, then the benefit to the rest of us would have been much the same as it actually is.
You may be right, but I don't see what that "something else" could be. It would have to be something where some actor benefits from quick reaction and low spread, right? AFAICT, that must be either HFT or something indistinguishable from HFT. Something with the same traits, blamed by the same people for the same reasons.
That is, have a market where orders accummulate in the order book and every, say, 15 seconds, the order book is crossed and trades are made.
On the other hand, I think a kind of relation between prize of an operation and its energetic cost would be beneficial (like ---as an example--- forcing an operation to compute a hash of proportional difficulty, or whatever). But this is a different problem.
I’m not largely a free market is the only solution person but this is a very bad example of ‘natural’ monopolies.
Even in the old consolidated system you had differentiation between the exchanges in the form of exchange rules which led to Nasdaq specializing in different listings than NYSE.
If you look at the commodities exchanges they were even more specialized and splintered until legal interventions made those specializations less valuable.
It was governmental intervention that made liquidity the only factor in exchange choice.
I remember first hearing about these ideas in the mid-noughties (around 2004..2007), but then again, I was in a technical university with an economics department. The FCA link refers to a paper from 2013, so by that time the topic should have been pretty well researched.
0: https://www.fca.org.uk/publications/research/periodic-auctio...
Those same inefficiencies in the market would be seen at 59 minutes, at 30 minutes, at 10 minutes, but get less and less impactful each time. HFTs basically provide a service that gives you almost instant liquidity and market making, which is valuable to anyone who's looking to act quickly buying or selling.
This is largely everyone. If you need to rebalance your portfolio into more cash, say because you are paying for college, the lower the spread the lower your transaction cost.
Quite a number of them went under. So even such clearest cut front-running is not a fool proof strategy with "money out of thin air."
Seeing somebody saying "give me money, and I will multiply them with some magic mumbo jumbo" they themselves don't seem to understand, if the most usual investment industry hot air.
If being a market maker is profitable, then this profit derives from executing trades. Because the exchange directs trade to the best offer, the profit goes to whoever offers the best price, which is whoever adjusts its offer prices quickest. That's the recipe for HFT.
This is computer now, but back in 1890 (picking a date where there were stock markets, but obviously no computers) there were people who worked on the floor of the various stock exchanges called market makers. They own a bunch off shares of one company, and agree to buy or sell to anyone. When some broker (ie agent for a trader who may not live in the same city) walks on the floor wanting to buy stock they don't have to wait for someone else walking on willing to sell, instead they go to this person who is always willing to sell stock. Latter when broker (again agent for a trader) wants sell stock the market maker will buy their shares. This is much quicker than the two traders needing to find each other and agree to a price.
The market maker makes money be the spread. When the two traders above buy or sell with the trader they don't get the same price. Instead if the stock is listed for $10/share the person buying is really paying an extra price, $11/share (for example it is almost always pennies), and the person selling actually is getting $9/share (again an absurd example). The market marker is thus making $1/share for every share of stock traded.
The spread thus clearly is taking money from the traders. This is above the money you have to pay your broker to make the trade for you.
For comparison, before the "internet", here were minimum $50 and $100 commissions on stock buys. 2%-3% buy-sell spreads were common. HFT is critical to allow each paper to be traded in multiple competing venues. etc etc
HFT who play market-maker for a microsecond do not create liqidity and have no value for society. Well, strictly speaking they create liquidity for the first 100-share lot of trades that a real-money market participant needs to do, and act as costly parasites for the other hundred or thousands lots that they need to do.
Anyone whose a market maker is playing in the HFT space, otherwise you can't cancel fast enough when the market moves otherwise.
Other uses of HFT are interlisted arb that keeps companies that trade in multiple countries at the appropriate non arbitrage price.
Or even inter market arb that keeps prices on each exchange in the US at a non arbitrage price.
I mean the entire currency market is kept in sync due to HFT.
They also do ETF arb that keeps ETF prices at, you guess it, their non arbitrage price.
These are all things that were done very poorly before HFT, and well computerization in general of the market.
The one thing I find when making these comments is people keep moving the goal posts.
Remember:
At one point HFT was being able to trade multiple times a minute with a computer. That was HFT at a time in the 80s.
Then being able to trade a a second level to keep exchange prices in sync, that was at one time HFT level speed. That was HFT in the 90s.
People now take that HFT behaviour for granted and try to move the goal posts to micro second timing forgetting that the above are all hft activities, its just that many more people can do them now.
HFT has undeniably shrunk spreads and decreased what the average person pays to buy the market.
Because HFT would naturally operate over already high-liquidity papers. There's no point in HFTing low-volume stocks.
Also not all HFT needs to rely on having the fastest transaction speeds. So, yeah, sure, having another buyer/seller does increase liquidity, but TSLA is liquid enough without it.
So the better these HFT firms are, the less it costs you to get in and out of the positions you want.
A HFT typically has a given stock of Siemens and offers to buy and sell. Suppose one has 100 shares and offers to buy and sell two, you want to buy forty. You'll get two, and the HFT will put two more on the market, at slightly higher prices, and wait to see whether you buy.
How much higher/lower? Obviously they'd like to raise the price quickly to the highest price you'll pay, without raising it so high that you buy from someone else, and equally obviously you don't tell them what price that is. Will the HFT firm's software have better heuristics than your broker's?
You can think of HFTs as market makers, liquidity providers, and automated price discovery. For their services, they end up being able to slice a penny off the top of a lot of orders.
>You also lose all the money that's driving technological advancements (like that fiber cable).
Isn't this circular? If they weren't capturing wealth created by other actors, they tautologically wouldn't have it to invest in the first place. That said, it's true that the money might not then be invested in this sort of technology.
With the bid-ask spread being wider, that adds a transaction cost to every trade, as you can't sell for the price you just bought. This means that trades are more expensive and riskier. HFT provides liquidity that reduces those risks.
HFT seems to me to be one of those words that means two different things and people select the version of HFT that fits their arguments. "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. "Good" HFT is a market maker with tons of info who just gets there first every time because they're FAST.
You can see how the amount of info HFT turns it "good" or "bad", and that's a tightly held trade secret for most of the trading firms, so it's a grey area.
Importantly, those don't exist.
I bet videogaming companies will go for this fibre, though it wasn't those bank companies doing the research of course.
Imagine, pay $10 a month, and get half the ping than anybody else in Q3.
Has a similar effect to using an aimbot (which are dis-allowed).
>“When you’re sending light into a solid fiber, it’s like you’re sending it through a window 50 miles thick,” said Dave Gustafson, a former head of wireless engineering at Jump. “With hollow-core, you’re sending it through 50 miles of air.”