NJ Server Farms Remake the US Financial Markets 216
1sockchuck writes "The engine of Wall Street has shifted from the stock exchange floor to data centers in New Jersey, where computer-driven trading now accounts for 56 percent of all trading activity, according to the New York Times. 'While this Tron landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company,' the Times writes. 'For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.' There are also photos of the data centers powering the high-speed trading operations, while 60 Minutes has video of a huge new 'liquidity center' run by the NYSE."
Re:Throbbing money (Score:4, Informative)
>Can pennies throb?
Sure. It's a widely used idiom, popular in phrases such as "The sweaty lumberjack lustfully thrust his throbbing pennies deep into the moist slot of the pink piggy-bank."
Re:Whoop De Doo (Score:5, Informative)
Re:in-equity (Score:4, Informative)
Personally I think bids and offers should be matched up only once every hour ... I don't see any need for this stuff to happen at wire speeds.
Numerous markets had, and do have, this "feature." For example, trade-at-close aggregates all the orders at the day's close, and everyone gets the same price if the close price is within their limit.
The effect of this feature was to benefit the technologically sophisticated traders (I was one back in the nineties.) You waited until a few seconds before the close, then slammed limit orders onto everything that moved: the poor retail guy who had put in an order 1 minute ago was your counterparty, and he had just given you a free option for 58 seconds.
Re:Common View, Common Error (Score:3, Informative)
I've worked in markets for years, though nobody can really can themselves an expert in something so complex.
As for dividends, there's no requirement that you hold on to high-div stocks for a long time. Also, and this is critical, you know exactly when that dividend is coming out of the price. So, basically, it completely doesn't matter whether the stock is paying a high dividend or not, since the liquidity providers know this. Having a narrow spread is good for you no matter what you're buying.
BTW, you might like to consider that ALL prices can be considered as bid/ask spreads. It's just that in your everyday life, people tend to only show you ONE side. In a supermarket, all the prices are Walmart's ASK price. Walmart got your potatoes by BIDDING for them from the wholesaler. They pocket the difference (bid-ask spread) just like a market maker.
When you buy a house, you are BIDDING (though confusingly this is colloquially called an offer on a house). If the owner is wanting 100K, and you are willing to pay 95K, one of these things will happen: 1) You cross the spread to LIFT THE OFFER 2)He crosses the spread to HIT THE BID 3) One of you moves their price and either 1 or 2 happens. The guy who crossed the spread is the aggressor, and he basically has swapped 5K for immediacy, ie to make the deal happen now rather than wait.
Re:Common View, Common Error (Score:3, Informative)
Analogy for why you need a market maker:
There's a market where farmers come to sell pigs, and butchers come to buy them. Unfortunately, the farmers and the butchers are not there at the same time. They might arrange a market day, which concentrates the trading in certain periods. Fine. But that leaves risk. What if market day is in a few months, and farmer doesn't know whether it's worth making some more pigs? Maybe he'll keep safe and decide not to. Result: fewer pigs, even if butcher actually wanted to buy them.
So, let's keep the market open. But farmers and butchers won't know when to show up? What if I go to market, and no butchers are there? Same problem as before... take less risk.
Enter the market maker. He doesn't know how to farm or butcher, but he does hang out at the market all day. He has a good idea of how many pigs are needed, because each time a real farmer/butcher comes in, someone is asking around about the pig price. So he uses his own money to buy pigs from farmers and sells them to butchers, based on what he thinks the balance is. So now, farmer guy can offload his pigs, and butcher guy can buy them, without having to coordinate with each other. They just talk to the middle man.
Now, the middle man has to manage the pig inventory. What prices does he make? Well, again, he thinks about risk. If he makes a wide spread, he'll make more money on each turn. But that will discourage the farmers/butchers, because they lose more from when they do their business. But if he tightens, he'll make less. He'd have to have enough business to compensate.
Enter middle man 2. He spots the same opportunity. Interestingly, now the two middle men need to trade with each other. And also, their trading doesn't need to be governed by the external customers.
Re:short term skimming (Score:5, Informative)
It doessn't. Recent regulatory changes at the SEC, and promises to "review" the situation, have carefully avoided striking at the heart of the larger investment companies and groups that both engage in this sort of behavior, and have enough spare cash to fund politicians and arrange their own "reports" for the SEC on how disemboweling thihs sort of high-speed trading would "hinder the market".
It's insider trading with a high-tech cover. The data is not avaialble to ordinary investors in time for them to take keaningful action: the millisecond of having their servers right near the NySE overwhelm the reponse times of any ordinary trading entity and prevent their meaningful responses.