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Businesses Math The Almighty Buck Hardware

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.'"
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Barbarians At the Gateways

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  • by ShanghaiBill ( 739463 ) on Friday October 18, 2013 @12:42PM (#45166147)

    Make all offers valid for at minimum one second and poof 99% of high frequency "trading" vanishes.

    ... and transactions costs go up for everyone. Do you understand that the buy-sell spread has fallen dramatically since HFT became feasible?

  • Uh (Score:2, Interesting)

    by ShooterNeo ( 555040 ) on Friday October 18, 2013 @12:46PM (#45166215)

    Isn't HFT just insider trading?

    Insider trading = making stock trades using information that has not yet been disseminated to the open market.

    HFT trading = using mathematical algorithms to detect the reaction of the open market to information, and to get ahead of it to make advantageous trades before the entire market can react.

  • Gross receipts tax (Score:5, Interesting)

    by Overzeetop ( 214511 ) on Friday October 18, 2013 @12:53PM (#45166301) Journal

    Forget "income" - change toa gross receipts tax. It only requires a couple percent (well, maybe up to 4) to have a sustainable tax base. You pay your real estate agent 6% to sell your house, you pay most brokers 2-4%, you should probably kick in a couple percent for the government defending that investment with nuclear weapons.

    No deductions, no exclusions. Whatever you receive, you pay 3% to the feds. My town happens to have a GRT for business and it's quite difficult to dodge. It makes HFT and short term, high volume trades a losing proposition. It effectively punishes any entity - person or corporation - which does not add value to a transaction. And that, imho, would be a good thing.

  • by Anonymous Coward on Friday October 18, 2013 @01:00PM (#45166395)

    It's a technical form of arbitrage, which is not illegal and may improve market liquidity. I think the downside is that trades are made on the basis of inferred choices and this distorts the real market influence of "People who invest" versus "Machines that exploit market mechanics." The former requires contextual analysis and the ability to evaluate products, management teams, etc. The latter is a numbers game of pre-destined metric comparison, equivalent to banal tasks such as gold farming in an MMORPG.

  • by edman007 ( 1097925 ) on Friday October 18, 2013 @01:30PM (#45166803)

    How much? As someone who invests for the long term, I really don't see large spreads affecting me. Right now, looking at google, I see a spread of 16 cents on a $1000/share stock. If I invest in that stock, I'd probably consider anything under 1% in gains a wash, so the spread would have to be over $10 to even factor into my decision making. I don't care if the spreads go up 10x, to $1.50 on that stock, it won't affect me, yes I'll lose that extra dollar or so, but I'm trading on double digit gains/losses, if I buy at $700 and sell at $1000 I don't care about that $1.50, it doesn't materially hurt me. All that HFT does it make the stocks react faster to the news, and the cost is that the HFT people get to suck money out of the market for nothing (though make it liquid I suppose), But is that something we really need? I don't need it that liquid for my investments, and the businesses don't either.

    If it was up to me I'd change the stock exchanges to process one trade per account per stock per day, all at 4pm (meaning you got the whole day to enter your trades, speed won't have an effect at all).

  • Re:Liquidity (Score:5, Interesting)

    by DCFusor ( 1763438 ) on Friday October 18, 2013 @03:43PM (#45168735) Homepage
    Trader myself. Mod parents up - they are correct. Check the Knight trading debacle: []
    The deployed their test harness instead of their HFT bots for 44 min and lost half a billion in that time - now out of business. I made good money during that time using human judgement. You can often catch an accidental high bid or low ask from an HFT, when they screw up, which is fairly often, as well.

The absent ones are always at fault.