High-Frequency Traders Use 50-Year-Old Wireless Tech 395
jfruh writes "In the world of high-frequency stock trading, every millisecond is money. That's why many firms are getting information and sending big orders not through modern fiber-optic networks, but using line-of-site microwave repeaters, a technology that's over 50 years old. Because electromagnetic radiation passes more quickly through air than glass, and takes a more direct route, the older technology is seeing something of a renaissance."
line of SIGHT (Score:5, Informative)
The traders who want to keep their jobs use line-of-SIGHT microwave transmission.
Have no clue what line-of-site is, but sounds like it doesn't transmit beyond the local building.
Assclown submitter and illiterate editor.
Value of real world doesn't change in a microsec (Score:4, Informative)
The main reason the traders want microsecond responses is to respond to each other, not to developments in the real world.
Once one trader buys shares, these change in value, which can trigger automated responses from all the other traders. And frankly, the combined algorithm of all these traders is what makes the market behave as it does. And that's so complicated that nobody can test it for every eventuality (also, the algorithms are secret). I can see that some people think that there is an element of randomness in that.
I think it is more like a double pendulum, or the butterfly effect. Science can explain what happened, looking back, but science cannot easily predict what will happen in a few minutes. It does have an element of randomness. It is not completely random, but to a layman it sure seems to be random.
Unfortunately, recent history has shown that the traders understand the market just as well as any layman. And that means this is just a form of gambling.
Many years ago.... (Score:4, Informative)
I was involved in establishing one of the first major Electronic Markets in Germany. The country was quite decentralised with regional financial centres so we made sure that everyone communicated with the exchange (situated in Frankfurt) at the same speed. We even had line simulators to ensure that users in Frankfurt saw similar response times to users in Hamburg.
Now exchanges are more or less forced to join the race for the bottom by offering co-lo services (rackspace in the Exchange) where you are just a LAN switch away from theeExchange infrastructure. If you don't support that, the alleged "liquidity" moves to another exchange. Inside the machines, the algorithms are now run on the graphics cards (cheap multiprocessing) so they can run evven faster. Others use custom signal processing hardware.
Users actually issuing buy or sell orders to hold are never that close, the decision making happens within the institution not in the Exchange building. The "algo" machines just act as a man in the mmiddle driving prices to their advantage. Also, the algo traders are imposing a massive load on the order book and matching code within the exchange's systems. generally speaking the systems were chosen for reliability rather than pure speed.
Re:Great... (Score:4, Informative)
How?
As a long term investor, if I want to buy, I buy at the current ask price, if I want to sell, I sell at the current bid price.
I depend on there being people who want to offer prices. They offer those prices because they think that they can match buyers to sellers. They make their money from the difference in bid and ask prices.
Make them slow down and they'll have to expand their bid/ask spread to allow for the fact that the market might move between them finding a seller and them being allowed to sell to a buyer.
Sure, by having small spreads, there are then people who think they can make money from short term price fluctuations, but they're making tiny amounts and therefore having to make huge trades. That's great for me because it means there's plenty of liquidity. Make the spreads wider and they'll disappear from the market - if shares have got to go up 5% to even break even on a trade then there won't be any day trading. But I'll be losing 5% on every deal as well.
There are abuses of the system. Most of them are already illegal but are either currently impossible to detect or there isn't an incentive to investigate them (or both). Fix that part of the system and HFT just becomes another way to invest that complements the long term investors who don't want to play a high adrenalin, high stakes game.
Tim.
Re:where is the random? (Score:5, Informative)
private account in the trading system that returns 3% PER DAY.
In other words. If she invest $1000 in her account, she will have $136.423.718 after two years of trading. Insane - or she might have been exaggerating.
($1000*1.03^400 = $136.423.718 (200 trading days per year))
Re:High-frequency trading doesn't benefit the econ (Score:5, Informative)
You really think algorithms that feed off of and fight each other on microsecond timescales, placing and then shorting more orders for shares of companies than exist in the entire world, reduce volatility?
I know for a fact that HFT's reduce the spread between BID and ASK because numerous studies have been done showing empirically that this is the case. This means that all the people that cry that they are "siphoning money off the market" and other such crap are full of shit. You are getting better BID's and ASK's because the HFT's are in the market, therefore their percentage of the transaction is just a few for a worthwhile service.
Here is one citation [wiley.com] and if you want the PDF, try here. [afajof.org]
The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.
Data and facts trumps FUD every day of the week in my book.
Re:where is the random? (Score:2, Informative)
Right, but not without destroying millions of dollars in value
Your argument hinges on this supposed destroyed value, so surely you can discuss this with a little more depth than simply making the claim, right?
And the SEC getting involved isn't a 'problem,' this is precisely what a regulatory authority is supposed to do.
The SEC is supposed to undo transactions because an HFT lost money? Really? Are you fucking retarded?
Re:where is the random? (Score:5, Informative)
No value is destroyed other than for those who decide to sell their stocks because the prices changed with "no actual cause", and even that value isn't destroyed it's transferred to those who bought the stocks when they were priced way under their actual value.
Re:Great... (Score:5, Informative)
No tin foil needed for microwave antennae. There's a reason it's called "line of sight" transmission. If you can't see your target (at least with binoculars), then the microwave transmission will be spotty at best to begin with, if it doesn't outright not work.
As for cell phone signal, which has an easier time penetrating normal structures, you still run into issues with regular old construction materials. Some insulation is aluminum-backed, I've even seen apartments with aluminum foil put up underneath the paneling, presumably to help hold heat in. Then for larger buildings, the metal frame itself or the steel rebar in concrete structures poses a huge obstacle for any EM signal.
Re:where is the random? (Score:3, Informative)
Re:where is the random? (Score:5, Informative)
I've worked in HFT for 7 years, at 2 companies, and I can tell you from this experience that you are wrong.
Entering and order and cancelling immediately repeatedly goes by many names, e.g. flashing, and is illegal. Companies that do it will at a minimum get fined (eliminating possibly profit from it), and can be expelled from the exchange - meaning no future profit.
ALL KINDS OF MANIPULATION ARE ILLEGAL.
Being HFT doesn't change that.
BTW I've seen the kinds of fines that the SROs can hand out (this was from a mistake, not even manipulation), and they are enough to make you blanch.
The SEC has been investigating HFT for years, learning whatever they can, and believe me, any company that can singlehandedly push the markets around is taken very seriously. A working stock market is the SEC's #1 concern.
HFT uses that same trades that people have used for years, such as arbitrage, but using technology to make it more efficient.
Re:Great... (Score:4, Informative)
What are you saying? That the stock market is random or that you can snapshot it and use it as a random seed? The first is wrong and the second as an actual implementation seems highly contrived and improbable. What kind of people are we talking about that would do this?
An actual place where this is used is seeding PRNGs used to select people for jury pools. They want the seed to be something verifiable by third parties after the fact, but not anything that could have been predicted in advance or manipulated to determine who will be in the pool.
Re:where is the random? (Score:4, Informative)
You mean rebates. It works like this:
You want to start a new "exchange" (ECN). No one wants to trade there - why would they, there isn't anyone buying or selling there: no liquidity.
You come up with an incentive fee schedule that will encourage market makers, and liquidity providers:
In every trade there is a passive and an aggressive side. Charge the aggressive side a fee (almost all exchanges do), but then rebate some of it to the passive side (almost always a market maker).
Hence, companies can make money by providing the market making service to the new exchange. Traders are encouraged by plenty of liquidity and low fees (compared to the existing exchanges). The liquidity is there because of the incentives.
Note that market making is very risky: leaving passive orders around the top of book is dangerous - when stocks change in value aggressors "sweep" the book, which is expensive for a market maker. The make a very small amount from most trades, but can lose it all on a single sweep.
They have to be very low-latency to make it profitable.
And yes, it's a service. Good luck running an exchange without market makers. Why would anyone submit orders to your empty books? What quotes would you publish?
2009 was a high point in HFT in equities - I know what I'm talking about here. Trading took a huge hit due to the economy. Lower trading means less money for HFT. HFT makes money from busy markets, high liquidity and moderate volatility.