From Chicago To New York And Back In 8.5 Milliseconds
Back in 2009 when the world wasn't filled with HFT 'experts', we deconstructed the topic of High Frequency Trading on a daily basis, and predicted not only the flash crash, not only debacles such as the Knight trading fiasco, not only the death of capital markets as a fund raising vehicle for companies who wish to go public (i.e. the FaceBook IPO fiasco), but much more (all of which has yet to pass before the stock market, as it was once known, is no more). The reason why little if anything can and will be done to fix the persistent threat to capital markets that is HFT is two fold: i) none of the current regulators understand anything about modern market topology, and ii) HFT is so embedded in markets that unrooting it would result in a complete reboot of "fair" stock valuation: imagine what would happen to stock prices if Knight and its "buy everything" algos were no longer present. Mass hysteria as the realization that vacauum tubes are now TBTF.
That said it is always amusing to observe as more and more people get in on the scam that is the "equity market", now completely dominated by robots which do nothing but accelerate and perpetuate momentum moves - after all it is all they can do in lieu of being able to read financials, or anticipate events. Remember: it is always the market that makes the news, never the other way around.
So it was entertaining and informative to read the latest recap of all events HFT-related as narrated by Wired's Jerry Adler, whose write up "Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading" does an admirable job of showing how not only nothing has changed since those days in 2009 full of warning, but how in fact things are moving ever faster to what will one day be a trading singularity, limited strictly by the speed of light (and maybe even surpassing that). Of all the things in the article, the one we found most curious is that since 2009, the round trip from the biggest quant trading hub in Chicago to the exchange hubs in NY and NJ, has been cut by over 50%, or from over 13 milliseconds to just about 9 milliseconds, courtesy of Microwaves.
Naturally, where microwaves propagate, neutrinos are soon to follow:
And it’s not just the words of central bankers that matter in this world. Almost any kind of data that in any way bears on economic activity, no matter at what remove, is being aggregated and tested for its potential impact on stock prices. GPS data, showing concentrations of cell phone users in malls or office buildings, has been used to get a real-time read on economic activity. Even the most ephemeral shards in the digital scrap heap, old Twitter posts, are proving of value, if you can get your hands on enough of them. For their starkly titled paper “Twitter Mood Predicts the Stock Market,” Johan Bollen, an informatics researcher at Indiana University, and two colleagues collected almost 10 million tweets from 2008, aggregating phrases that indicate emotional state and analyzing them along dimensions of feeling such as “calm,” “alert,” “sure,” “vital” and “happy.” They then looked for correlations with stock prices and discovered that a surge in “calm” sentiment reliably predicted an increase in the Dow Jones Industrial Average two to six days later. No one, including Bollen, knows what this means or why it should be so, but if quants had a coat of arms, it would say, “If it works, trade on it.”
Furthermore, trade on it now, this microsecond. It is only a matter of time, perhaps a few decades, says Alexander Wissner-Gross, a Harvard physicist, before some hedge fund decides it needs a particle accelerator to generate neutrinos, and then everyone will want one. Yes, they travel slower than light, but they indisputably can tunnel through the earth, cutting thousands of miles off an intercontinental message. And just a few days before the Battle of the Quants, right before the bad news about faster-than-light neutrinos, researchers announced they had sent a message by neutrino from the Fermilab accelerator in Chicago to a detector a kilometer away. According to Dan Stancil of North Carolina State University, the signal traveled at “very close to” the speed of light. Unfortunately, the data rate was only about 0.1 bits per second, meaning it would be useless for much more than sending a yes/no signal. “With the right modulation scheme, this could be increased by at least one or two orders of magnitude,” Stancil said, adding “I don’t know of a compelling commercial application.” But we’ve all heard the (apocryphal) story that Thomas J. Watson of IBM predicted “a world market for maybe five computers.” Stancil knows physics, but he seems never to have worked in finance. Any quant would know what to do next.
As we have been warning since the spring of 2009: have fun trading this market, human. You will lose all the time. 100% guaranteed.
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