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."
Great... (Score:5, Insightful)
In the world of high-frequency stock trading, every millisecond is money
Always good to be reassured that the market reflects the intrinsic value of the companies instead of behaving as a high-tech casino.
The worst sort of technological development (Score:5, Insightful)
When you have hundreds if not thousands of highly educated minds bent on squeezing out the very last drop of speed to facilitate an activity which is right up there with spamming in terms of societal benefit, well it strikes me as a tremendous and tragic waste. And yet this is what pays the bills. So: score it one point for capitalism. Yay.
50 Year old tech (Score:2, Insightful)
Just like Hungry Jacks (Burger King) uses 50 year old tech to heat my burgers.
Re:where is the random? (Score:4, Insightful)
If it needs quick transmission of information, then it does reflect reality.
Oh it reflects reality, alright. But it is detached from the companies whose stocks the market is supposed to represent
It reacts to other people buying/selling -- a few flash crashes have already demonstrated that. One faulty algorithm accidentally dumps lots of stocks and the entire market goes into a tailspin (with no actual cause)
Re:The worst sort of technological development (Score:4, Insightful)
When you have hundreds if not thousands of highly educated minds bent on squeezing out the very last drop of speed to facilitate an activity which is right up there with spamming in terms of societal benefit, well it strikes me as a tremendous and tragic waste.
It is only sad that people are working to squeeze more speed from the transmission speed
The truly tragic part is that people get an edge by buying server rooms closer to the stock market to win a few picoseconds
That's like paying $100 bucks to the dealer to be able to see other guy's hand in a poker game.
Re:where is the random? (Score:5, Insightful)
Go read up what high speed algo traders are doing and you might change that opinion.
They are abusing their latency advantage by adding orders that they cancel microseconds later, and other manipulative events that siphons value from other traders.
Your truck analogy would be me selling you 1.5 ton gold, and being aware that you're going to drive 2000km and sell it at a profit, after selling it to you I phone my contact 2000kms away and have him sell another 1.5 ton gold at your target destination. When you arrive there, my contact have ruined your initial profit opportunity, and you're either stuck with no liquidity or can sell your 1.5 ton gold to my contact agent at a loss. So not only did I steal your opportunity, I decided to earn money off you by selling my gold to you at first for profit, and then buying it back, at profit again.
This is not about me having an 18 wheeler, it's about me being massively priviledged in both capital, resources and information flow and using it to vampire money from the efforts of others. It doesn't add value, or efficiency, it removes it and adds voltatility and risk to everything.
Re:Great... (Score:2, Insightful)
Re:where is the random? (Score:4, Insightful)
High Frequency trading is essentially the action of manipulating the system, constantly creating and destroying orders faster than others involved in the market.
By this, you can essentially become a man-in-the-middle for market transactions and skim a small amount off of each.
Additionally, many of the algorithms simply forge orders and then subsequently cancel them faster than the system can process them. What this does is basically slow down the system for everyone else, and create a lag that they can further take advantage of to skim off the top.
The major trading indicies are OK with this, because they are paid on a per-transaction basis, and happily collect their fraction of a cent from each of these high-speed traders.
In some low volume, they do represent increased liquidity in the market and they do bring buy-sell spreads down. This is why it was first allowed in the 1990s by the market makers.
Today, they represent something like 60%-80% of all market traffic and simply skim dollars off of trades. They invest big money in artificially delaying other people's transactions to manipulate the spread between a buy and sell order and to take advantage of market swings, because they can issue multiple buy-sell-buy-sell sequences before a single long-term buyer is capable of getting a single order in.
It is nothing more than a high-tech fraud... it appears to be legal right now, because nobody has decided to stop it and has many powerful billionaires behind it, but in the end, it's not much different than the scheme in Superman 2 or Office Space. Skim a quarter penny off every transaction and I guess nobody notices....
Re:Get closer (Score:4, Insightful)
Arbitrage between different exchanges..
Re:where is the random? (Score:5, Insightful)
The only problem is when the SEC gets involved and undoes transactions to protect the automated traders from the massive losses incurred by their incorrect valuation.
Re:where is the random? (Score:4, Insightful)
Re:where is the random? (Score:5, Insightful)
"Now that we've established what you are, ma'am, it's simply a matter of negotiating the price."
Re:where is the random? (Score:5, Insightful)
No she doesn't, she's simply likes to lie and you didn't bother doing the trivial "does that make sense" check before repeating those lies.
Or you're doing the initial lying, of course.
Re:Great... (Score:5, Insightful)
All these stories about traders needing ultralow latencies is a symptom of a fundamentally broken system.
So what's broken? Before we start fixing things, shouldn't we have a problem first?
The system should be modified to be round based rather than real-time.
Real-time looks better to me.
10 seconds per round is long enough
That's a bit too long for a round. How about 10 nanoseconds instead? I might be a bit facetious here, but I see no reason to help out slower traders. The market exists to trade things, not to play favorites. Those low latency traders have to work hard to gain their modest market advantage. And that is as it should be.
In addition to the usual market benefits (such as lightning fast arbitrage and hedging, greater liquidity, etc), we also have a great arms race going on. This whole story is about a concrete spin off of HFT -- better microwave communication.
Re:Why is this legal? (Score:4, Insightful)
I don't think I understand you. Are you saying we should legalize fraud and bank robbery?
I think hoboroadie is saying that we have -already- made fraud and bank robbery legal by the way we allow the system to work (e.g. high-frequency trading and it's associated stock manipulation being allowed - my example, not hobo's)
Re:where is the random? (Score:3, Insightful)
Because they make the rules. They pay Congress. They get what they want. Its why their income has increased and most everyone else's income has not. Its why they made a profit in the last economic disaster. Its why they were bailed out knowing they would need to be bailed out. Its why they made a profit on being bailed out. Its why they all made bonuses on the fact they "failed." Its why Congress has blocked three calls to investigate and punish the people responsible for violating the law.
Seriously, if you want to know who actually runs the would, look no further than financial institutions.
Re:where is the random? (Score:4, Insightful)
In your example, Trader #2 wouldn't agree, since $1.02 is over his budget.
Here's how it really works.
All market participants send their orders into the exchange. For simplicity let's stick with limit orders: A limit order is like a budget: I'm willing to pay up to $x for stock y, or I'm willing to sell stock y for as low as $y.
Ignoring the open, since it complicates things, during the day all the limit orders are resting (passively) on the book. Generally these passive orders are submitted to the exchange by market makers. In liquid stocks the best buy will be 1c below the best sell - in other words trader P is willing to but at or below prise $X and trader Q is willing to sell at or above $Y and Y - X = $0.01. Since the exchange cannot fulfill those orders by matching them they must rest on the book.
Now enter an investor - or actually his broker. He wants the best possible price. Suppose he is buying. In order for him to get a trade, he must be willing to pay at least the minimum sale price - in the example above that would be $Y. If he submits lower than that his order won't trade. If he submits higher he gets price improvement and still matches the best price available of $Y.
The exchange cannot match at worse prices than the best bid and ask - and there is a national best bid and ask (NBBO) to protect people.
Where does HFT come into this? He's usually P and Q. He's the passive trader. And if you simultaneously submit a 1 lot market order buy and a market order sell for the same stock you will lose $0.01 - this is how the market maker makes money.
There is no HFT between you and the exchange.
Note - the market maker is actually taking a significant risk. These prices can change rapidly. When they do, aggressive traders send "sweep" orders, which just means they can match several price levels. The exchange matches the market maker's order with the sweep, but the value of it has changed, and the market maker loses a significant amount of money. They avoid this by trying to adjust their prices as quickly as possible.
Also - without the market makers you'd have an empty book - and no one to trade with.
Make things harder/slower/more expensive for the market maker and the spreads widen - meaning it costs you more to trade. They call this inefficiency.
You actually see this in other markets - such as government bonds where they have "work-up" which is very much like a minimum hold time. They are much more inefficient markets - treasuries are expensive to trade partly as a result.