Barbarians At the Gateways 321
CowboyRobot writes "Former high-frequency trader Jacob Loveless gives an in-depth description of the math and technology involved in HFT. From the article: 'The first step in HFT is to place the systems where the exchanges are. Light passing through fiber takes 49 microseconds to travel 10,000 meters, and that's all the time available in many cases. In New York, there are at least six data centers you need to collocate in to be competitive in equities. In other assets (foreign exchange, for example), you need only one or two in New York, but you also need one in London and probably one in Chicago. The problem of collocation seems straightforward: 1. Contact data center. 2. Negotiate contract. 3. Profit. The details, however, are where the first systems problem arises. The real estate is extremely expensive, and the cost of power is an ever-crushing force on the bottom line. A 17.3-kilowatt cabinet will run $14,000 per month. Assuming a modest HFT draw of 750 watts per server, 17 kilowatts can be taken by 23 servers. It's also important to ensure you get the right collocation. In many markets, the length of the cable within the same building is a competitive advantage. Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.'"
Liquidity (Score:5, Insightful)
Please, I just pray nobody justifies this obvious non-productive activity by explaining it lends necessary liquidity to the markets. The markets were liquid enough for me back when telegraphs were used to send messages to human traders.
What purpose does HFT serve? (Score:5, Insightful)
Please enlighten me, dear wizards of the wall street. Please teach me what purpose HFT serves to our economy.
Somehow, to me this just looks like it is the most blatant proof that the whole stock trade has become a self serving gambling place without any connection to reality and economy anymore. It used to serve the purpose of accumulating money for projects larger than what any single person or even government could finance. Today, it is just a self serving leech on our economy.
Easy solution for all their technical problems. (Score:5, Insightful)
Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.
Re:What purpose does HFT serve? (Score:5, Insightful)
I'm obviously a rube with regards to how the magic happens beyond "Strike first, strike fast, strike often!" but it's pretty fucking clear to everyone that Average Joe doesn't benefit one bit from this unless he's bought stock in SuperHFT TradeCo.
Nobody benefits from this except 1/100th of 1%'ers trying to move into the 1/1000th of 1%'ers at the sake of making sure that you or I can't possibly play, because the playing field is so un-level it's a miracle we don't slide right off it... ...after leaving our wallets.
Re:Easy solution for all their technical problems. (Score:4, Insightful)
"the buy-sell spread has fallen dramatically "
Is this good, and for whom?
Comment removed (Score:5, Insightful)
Re:What purpose does HFT serve? (Score:2, Insightful)
Of course it is not gambling -- it is a form of legalized front-running. This entire ecosystem of parasites could be trivially destroyed if regulators change the way market matches bids and asks -- for example by stipulating that trading needs to be done in round of 1 minute each -- first 50 seconds it accepts bids and asks, and last 10 -- matching them in fair manner (and splitting margins between participants). That is it -- in a blink of an eye all these smart men will be off doing smth actually productive.
Re:What purpose does HFT serve? (Score:4, Insightful)
Your post is otherwise insightful, but the derision expressed by that statement counteracts the value you've brought to the discussion. As for your comment on bankers: holding your money is indeed half of the job of retail bankers (the other half being to lend to loan-worthy borrowers, which includes the oft-neglected part of actually determining who is loan-worthy). I'm pretty sure laymen have no issue distinguishing between retail and investment banking.
Re:What purpose does HFT serve? (Score:4, Insightful)
Just because something is legal doesn't mean it's right. 400 years ago it was legal to burn women as witches. And just 50 years ago it was legal to kick a black guy out of a bus for sitting on the wrong seat.
And since laws are made by those that have the money, take a wild guess who laws benefit.
Re:What purpose does HFT serve? (Score:2, Insightful)
You make no sense. Sure, I have to go through a brokerage to make a trade on the NYSE. Where would that trade go if there were no HFTers? I bet it would go to another brokerage that was buying/selling, or to a market maker, which would move the price. What makes the HFTs necessary, other than their overwhelming presence in the trading volume by virtue of being there?
Re:What purpose does HFT serve? (Score:4, Insightful)
Erh... that was the original idea of stock companies. You can't afford to build $huge_project, I can't and there's nobody who can. Hell, even we together cannot. But if we can find a few hundred or a few thousand people who're willing to invest a few bucks, we can pull it off. And everyone owns (and controls) as much of the company as his shares say.
If this ingenious pinnacle of capitalist ideal, a joint ownership of an enterprise dependent on your invested capital, is now considered communism, the system sure as hell needs a lot of repairs!
Re:What purpose does HFT serve? (Score:4, Insightful)
I love that phrase, "making" money. When you think about it, this kind of activity doesn't "make" money at all. It does not create wealth. It shifts wealth that exists, to feed the bottomless avarice of the parasites who think they are entitled to something for nothing. The only thing that can CREATE wealth - i.e., feed people and house them - is actual useful work that produces products like food and housing.
Re:What purpose does HFT serve? (Score:3, Insightful)
"Arbitrage" is a real and beneficial thing when you have a pack animal and are shelping goods to the nearest village on the other side of a mountain. It is good because it allows goods to be distributed where there is demand more efficiently and over time it helps to make sure the people who produce goods get to sell closer to what customers are willing to pay. This happens because the demand of the traders over time will increase the price at point of production as they compete over sales at the point of consumption. In the classic sense the people who benefited from arbitrage provided an actual service by actually moving goods, or money, to places where there is a distortion in the marketplace and help provide long term stability to the market.
"Arbitrage" in this application is simply picking pockets. They provide no benefit to the buyers or sellers at all and only ADD instability to the market.
The only difference between a normal pick pocket and a HFT shop is that instead of taking your whole purse, they take just one copper out of it. However they do it every single dam time you open it.
They are thieving leeches and they should be outlawed.
They are not needed for liquidity anyway, liquidity is somewhat overrated as too much can distort the market , and it is already provided by market makers in practice, and by index funds and institutional investors in the current real-world.
Re:Liquidity (Score:5, Insightful)
The only real problem I can think of is that we've replaced that useless lump who has no real skills with mathetmaticians and engineers who could be doing something more useful elsewhere. It's probably not a great use of those resources, but it's pretty small scale.