Guest Post: The Ultimate Trading Weapon

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Tue, 09/21/2010 - 20:30 | 596151 Mercury
Mercury's picture

That's great, just what this market structure needs, an even less level, bumpier playing field with little pot holes of murky liquidity. Can't you just smell the Progress?

 The more securities exchanges become de-centralized, computer driven and independent of the physical world - in the name of cheap execution, access and competition of course - the less fair they become.

Actually, now that most physical exchanges are gone (or turned into TV studios)  physical location and access to a particular physical location is more important than ever. Oops.

Tue, 09/21/2010 - 20:43 | 596241 Rimpinths
Rimpinths's picture

It's a thousand time easier to colocate at an exchange than it was to acquire a seat on the NYSE fifty years ago. That is progress.

 

 

Tue, 09/21/2010 - 20:55 | 596265 TheMonetaryRed
TheMonetaryRed's picture

A colocated server in every pot!

And every man a King! 

Tue, 09/21/2010 - 21:00 | 596275 tmosley
tmosley's picture

A server in every pot, and a bot up everybody's ass.

Tue, 09/21/2010 - 23:28 | 596414 Mercury
Mercury's picture

It's a thousand time easier to colocate at an exchange than it was to acquire a seat on the NYSE fifty years ago. That is progress.

I'm not sure that's true in any meaningful way.  NYSE seat prices have gone up and down, all over the place,  year to year, decade to decade.

The point is: today's technology could be used to place all market participants on a more equal footing and within a more centralized, liquid and transparent marketplace than ever before.  Instead what we get is old privileges and advantages being replaced with new, different and more complex privileges and advantages that pose much greater systemic risks and are counter to some of the fundamental functions that markets are supposed to serve in the first place.

The fact that one market participant now has a structural advantage because they dug a fucking tunnel to the exchange doesn't strike me as the best advertisement for America's capital markets at this particular point in history.

HOWEVER, the toothpaste may be out of the tube on this one.  Even if you have a CLOB and eliminate HFT via minimum time frames or fees you will still have to prioritize orders by time and honor first-come/first serve.  Events that happen in Chicago or London or Singapore will always have the potential to impact markets in other locales. Transmitting that info (and the trades that are determined by it) from point A to point B as quickly as possible (roughly, the speed of light + distance) will always confer an advantage.  I'm not sure there is any practical way to eliminate that - maybe limit time stamp (fractional second) detail to a bit more than it takes light to travel half-way around the earth?  I'll have to think about that some more...

Wed, 09/22/2010 - 05:05 | 596695 euclidean
euclidean's picture

For less than $100 an hour you can hire some mechanical machinery that would turn that 13.3ms into a few weeks.

I hope they have penalty clauses for down time built into the lease rates.

Tue, 09/21/2010 - 21:11 | 596302 Eternal Student
Eternal Student's picture

Exactly. And it points out that this is the wrong approach. A waste of money, IMO. A long fibre cable is silly; the money would've been better spent sitting right next to the nearest backbone.

What he should've done is designed the high speed hardware sitting next to the backbone. Sophisticated enough to do things in microseconds, not milliseconds. This is quite possible, and the only thing I'm surprised at is that someone hasn't done it already, if this is the type of speed that he's bragging about.

Of course, you really need to know what you're doing here. And it's expensive. And it really helps to have the right design done by the right engineers (hint: Not the H1-B's that Tyler is pushing). But it should be quite doable.

Tue, 09/21/2010 - 21:41 | 596340 UninterestedObserver
UninterestedObserver's picture

? Sorry but you sound clueless - many of the HFT algos doing arbitrage need access to multiple exchanges and will execute multiple trades simultaneously on various exchanges hence the need for ultar low latency connectivity between exchanges. Primary low latency routes being sold are Chicago to NY,NY to London and London to Frankfurt.

Tue, 09/21/2010 - 23:56 | 596505 Eternal Student
Eternal Student's picture

Thanks for the elucidation. You are correct, HFT algos aren't my thing. Cutting edge hardware and software is.

Wed, 09/22/2010 - 01:44 | 596619 Mark Beck
Mark Beck's picture

If we put on our QUANT hat for the moment, the link between exchanges in regards to speed must jive with the strategy and weather you front run (stuff) or actually clear. For the strategy to work all aspects, including time, must be in place and tested (profiled). A bottleneck could kill efficiency especially if dynamic, regardless of the backbone speed.

Critical speed between exchanges, to maximize profits, would probably include a cross exchange trading strategy rooted in resolution speed and response. So there would have to be an active multidimensional real-time model looking at cross exchange effects to stuff or clear. However, you have to have all the pipes performing end-to-end.

----------

Now as an investment, if the bandwith price is much lower than the competition's for an equivalent service, then you have an edge if you can sell enough bandwidth.

Mark Beck

Tue, 09/21/2010 - 21:51 | 596367 kalasend
kalasend's picture


How do you know they're not using the fastest hardware available?

And design/building hardware from scratch? You have any idea how much that sort of things would cost comparing to digging? And how long it would take to test/manufacture processor chips?

And regarding sitting next to the nearest backbone...what nearest backbone? Strategies nowadays need data feeds from multiple exchanges. Where would you place the hardware?

Wed, 09/22/2010 - 00:08 | 596517 Eternal Student
Eternal Student's picture

Yes, actually I know it quite well. But I wasn't talking about CPU's; that would be silly and unneeded. The only ones who do that are the military shops, and startups. You can do astoundingly well with off-the-shelf components, which is what the big telecom outfits do, saving the customizations for the critical parts where there aren't OTS parts which meet the requirements.

Tue, 09/21/2010 - 21:36 | 596332 Rusty Shorts
Rusty Shorts's picture

 - actual video of construction.

http://www.youtube.com/watch?v=AFM8i6jJFOc

Tue, 09/21/2010 - 23:06 | 596468 Johnny Dangereaux
Johnny Dangereaux's picture

+825

Tue, 09/21/2010 - 21:58 | 596376 UninterestedObserver
UninterestedObserver's picture

This isn't really a big deal anyway I thought Level3 had a route around 15ms so it isn't like Joe retail wasn't already getting gang raped by algos - it will just happen a little faster now lol

Tue, 09/21/2010 - 20:03 | 596158 BORT
BORT's picture

So for the poor innocent sitting next to the lake trying to figure out how to leave something to the wife to keep her happy after your gone, what is the point.  Or perhaps, what is the option.  When does this game end?  I am all for new things and have embraced them over my 60+ years, but this is a whole other thing.  Can you still be successful in the market.  Is there a place for the longer term trend interpreter?

Tue, 09/21/2010 - 22:41 | 596430 Augustus
Augustus's picture

BORT,

It is a situation of an entirely different game.  They are moving Tens of Thousands of shares for a penny or less arbitrage spread.  It makes no real difference in the price you pay for 1000 sh of AAPL or in the value it will have in 10 yrs. if the widow decideds to sell it.

Tue, 09/21/2010 - 20:04 | 596159 Bearster
Bearster's picture

Obviously,the solution is to make it illegal for people to dig their own tunnels, run their own fiber cable, or buy their own routers.  If necessary, the Fed could take over the companies which make optical switches to ensure that no one in the trading business can buy them.

What's good for the Internet and e-commerce is bad for markets.  The markets will have to be controlled by government in order to keep them free!

Oh yeah, and there should be a tax based on 1 divided by the latency squared!  That ought to punish the low-latency kings, and if not, 1 over latency cubed or 1 over latency to the fourth!

"Anything you can build, we can destroy," said Mr. Thompson.

Tue, 09/21/2010 - 20:06 | 596163 IrrationalMan
IrrationalMan's picture

This must have been the technological improvements that our country so despretely needs that obama was reading off of his teleprompter at the town hall meeting monday. 

Tue, 09/21/2010 - 20:08 | 596167 SoCalBusted
SoCalBusted's picture

Shovel ready!

Tue, 09/21/2010 - 20:08 | 596168 Let them all fail
Let them all fail's picture

wow, this is just ridiculous, i can't believe that trying to make money off the market has come to this - absolutely appalling....

Tue, 09/21/2010 - 20:09 | 596170 DosZap
DosZap's picture

The solution is since we know how the game is rigged, don't play the game.

Sooner or later, the game ends, or new rules are brought about, because of the lack of players.

The Mkts were not set up to exclude the majority,without them, there is no Mkt.

At least not one that is sustainable.

If allowed to stay the way it is, what's left of FMC is for sure going to be dead.

Tue, 09/21/2010 - 20:54 | 596259 TheMonetaryRed
TheMonetaryRed's picture

"The Mkts were not set up to exclude the majority,without them, there is no Mkt."

Oh this thread just keeps getting funnier and funnier. 

Yeah, I forgot the Chicago Board Options exchange is for the masses. It's a regular Wal-Mart. 

Oi. 

 

Tue, 09/21/2010 - 21:43 | 596345 UninterestedObserver
UninterestedObserver's picture

I thought the solution was to sell the low latency routes to the trading firms and make fat commissions and then trade the dollars for gold....

Wed, 09/22/2010 - 02:55 | 596657 StychoKiller
StychoKiller's picture

Soon, less and less Stocks will be trading at faster and faster speeds until ZERO is trading instantaneously!  Sound good to anyone?

Wed, 09/22/2010 - 05:45 | 596700 euclidean
euclidean's picture

+1125 we'll call it the 'sk law of HFT', kind of like Moores law is to transistors.

There is a mathematical limit of infinite mass in an infnitely tiny space called a Schwarzschild singularity at the centre of a nonrotating black hole. That's what all these guys are heading towards.

Tue, 09/21/2010 - 20:11 | 596176 Carl Marks
Carl Marks's picture

I don't need no stinking cable. I've got satellite.

Tue, 09/21/2010 - 20:15 | 596178 Atomizer
Atomizer's picture

Who are you?
My card, pretty lady.
Devil May-Care Music Production, Beelzebub Scratch, President.
I like your style, too bad you're not a singer.
Oh, but I am, I am a singer!
Hmm, no fooling.
No, no listen...
Fantastic, different.
I want to be a star, of please!
You've talked me into it. Contract!
Just our standard contract, nothing fancy.
Fame, fortune, fans, gold records, concerts, world tours, your name in lights.
Take your time, read it all.
Oh, I give up. Can I trust you?
Ok, I'll sign.
Write!

http://www.youtube.com/watch?v=9lwQRpBzbxg

Where do I go from here?

Market Movers

http://www.cmavision.com/market-data/

Top 10 CDS Positions

http://www.isdacdsmarketplace.com/exposures_and_activity/top_10_cds_positions

 

Tue, 09/21/2010 - 20:45 | 596246 Careless Whisper
Careless Whisper's picture

"i signed in blood, it's more permanent."

that was sick. thanks.

Tue, 09/21/2010 - 20:16 | 596181 rickardswhite
rickardswhite's picture

Thanks Tyler, if I ever loose my shirt because of a flash anything and market crash I know which lines in the bush to take my anger out on.

Wed, 09/22/2010 - 00:31 | 596548 Real Estate Geek
Real Estate Geek's picture

A man with a backhoe--and a trailer--could regularly and periodically do some serious damage to that kind of infrastructure.  I sure hope that doesn't happen to those nice folks.

Tue, 09/21/2010 - 20:20 | 596186 The Rock
The Rock's picture

FUCK THE NAJARIAN BROTHERS BTW...

Tue, 09/21/2010 - 20:21 | 596188 cxl9
cxl9's picture

1. Wouldn't it be cheaper to just move your trading operation from Chicago to New York, rather than lease a long, expensive wire between the two cities? The food's better in New York anyway.

2. How long before some hillbilly in western Pennsylvania accidentially cuts that cable in half with a backhoe? Or maybe not so accidentally.

3. What happens to this massive investment when/if HFT is ever banned or reformed? It seems unlikely that the current window of opportunity for HFT will persist long enough to recover the full cost of digging that hole from Chicago to New York.

 

 

Tue, 09/21/2010 - 20:34 | 596222 Dr. Sandi
Dr. Sandi's picture

2. How long before some hillbilly in western Pennsylvania accidentially cuts that cable in half with a backhoe? Or maybe not so accidentally.

With stakes this high, how about somebody with their own algorithm HIRES some hillbilly in western Pennsylvania  to cut that cable in half with a backhoe at exactly 1:50 p.m. next Thursday.

3. What happens to this massive investment when/if HFT is ever banned or reformed? It seems unlikely that the current window of opportunity for HFT will persist long enough to recover the full cost of digging that hole from Chicago to New York.

We use the hole to bury the rest of the economy.

 

Tue, 09/21/2010 - 21:45 | 596352 UninterestedObserver
UninterestedObserver's picture

Fiber routes already existed - they just groomed them and used new router capabilities to carve out the fastest paths so they could provide latency gaurantees - Verizon was the first their route was around 17 MS

Tue, 09/21/2010 - 22:29 | 596420 rd
rd's picture

You kind of took the words out of my mouth. I'm sure a competitor or an enfuriated investor will do just that. I don't know what sort of redundancies they have to back up theire network but I'm quite sure they should have a few incidents near term that will make them scratch their heads. The reasons why others haven't done it before should be among the ones you highlighted. I bet sooner or later regulation will/SHOULD make them illegal.

Tue, 09/21/2010 - 23:51 | 596499 Jay
Jay's picture

@2.

 

The telecom industry already has a term for it: backhoe fade.

 

 

Tue, 09/21/2010 - 20:25 | 596196 skippy
skippy's picture

Hay FPS games on weekends and I'm cool with it. E&Y used to have late Friday inter-department  scrims using HL2CTF on their mainframe (in my city), I used to wipe the floor with them on pub servers lol.

 

Skippy...head snot ya TD w/ mag...lol. 

Tue, 09/21/2010 - 20:26 | 596199 surfsup
surfsup's picture

Brings new meaning to the words "flash crash"

Tue, 09/21/2010 - 20:27 | 596201 thermroc
thermroc's picture

This is fucking madness.

Someday we will look back at this and think what the fuck were we doing?

Investing all that effort tunneling through mountains, so we can send a piece of light from New York to Chicago 3 milliseconds faster than we already can, when our sewers and gas pipes are exploding.

We have totally and absolutely completely LOST THE FUCKING PLOT HERE PEOPLE.

Terminal. Fucking Terminal.

This is not even funny anymore. This is joke, right? This article has got to a be a joke.

Tulips, fucking tulips everywhere.

Tue, 09/21/2010 - 20:46 | 596247 TheMonetaryRed
TheMonetaryRed's picture

HAHAHAHA!

Oh, it's a crazy place, this capitalist paradise we call "America". 

Water, power, sewers, gas pipes, roads - who needs 'em!

Those people who want the 3 milliseconds got the do re mi, pal and the folks who want the regular kinda pipes don't.

Nah, that couldn't be it. Not possible.

Wow, this article made my day.

Gold to $1700. 

 

Tue, 09/21/2010 - 20:54 | 596260 espirit
espirit's picture

Gold to $2500, and that's just the start.

Tue, 09/21/2010 - 20:58 | 596269 TheMonetaryRed
TheMonetaryRed's picture

Gold to $3300, in hearts. 

Your bid. 

Tue, 09/21/2010 - 21:35 | 596331 thermroc
thermroc's picture

Gold to disappear.

Will re-emerge when sanity returns to the earth.

Your bid.

Tue, 09/21/2010 - 22:04 | 596389 TheMonetaryRed
TheMonetaryRed's picture

Gold's in a bubble.

No Trump. 

Your lead. 

Wed, 09/22/2010 - 11:46 | 597379 ZeroPower
ZeroPower's picture

LOL

You guys speak of tulips and bubbles, and here you are doing exactly the same thing your oh so precious metal.

Gold to stay stagnant within a +/-$300 range, how about them apples.

Tue, 09/21/2010 - 21:56 | 596374 cougar_w
cougar_w's picture

The world gets so complicated in the end that you cannot find your ass with both hands.

Then you die of constipation -- all Elvis-style with a lot of grunting with a lot of whu-the-fug -- because you just totally lost track of your own ass.

Or something. I'm tired. Where's the exit for "today"?

Tue, 09/21/2010 - 22:11 | 596394 Bose Einstein OracIe
Bose Einstein OracIe's picture

I hereby second the tulips.

Tue, 09/21/2010 - 20:29 | 596205 Dagny Taggart
Dagny Taggart's picture

Hey cxl9, as one of those PA hillbillies, I want to point out that if something like that was in the works, you just outted the whole operation.

Tue, 09/21/2010 - 20:29 | 596208 Careless Whisper
Careless Whisper's picture

i call bullshit

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