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From Chicago To New York And Back In 8.5 Milliseconds

Tyler Durden's picture




 

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.

 

Buy neutrinos.

More here.

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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Wed, 08/08/2012 - 10:57 | 2687639 zilverreiger
zilverreiger's picture

this better be weather proof, wireless is almost never a good idea, and does it burn through tinfoil hats or not?

Wed, 08/08/2012 - 11:00 | 2687655 Capitalist
Capitalist's picture

Skynet trade speeds are increasing at a geometric rate. The regulators know if they try to pull the plug, the capital markets would be eliminated.

Wed, 08/08/2012 - 11:14 | 2687687 i-dog
i-dog's picture

Global central planning doesn't anticipate capital markets ... just centrally allocated credits ... for approved 'Agenda 21' projects, only.

Wed, 08/08/2012 - 11:02 | 2687661 Jason T
Jason T's picture

aaannnd..it's gone.

Wed, 08/08/2012 - 11:02 | 2687662 HyperLazy
HyperLazy's picture

Let's see... my ping to NY is 120. So I can get scalped 14x before my orders hit...

Wed, 08/08/2012 - 12:15 | 2687751 TruthInSunshine
TruthInSunshine's picture

In more primal times, that would have been a criminal offense for each of the 14 times, and actual justice would have been meted out to the offenders.

Now, it's not only accepted practice to rob a penny or two (or three) on each of 8 to 14 billion transactions per day, but the chosen are actually assisted and aided by the special infrastructure that the best friends forever of the New York Branch of the Mother Whore Federal Reserve Bank have exclusive access to.

 

When history is written a few decades or so from now, there will be a special section about this titled:  Markets? Really...

Wed, 08/08/2012 - 11:03 | 2687666 firstdivision
firstdivision's picture

Makes me wonder why Cleveland isn't the HFT capital in the US.

Wed, 08/08/2012 - 11:18 | 2687717 The Wizard of Oz
The Wizard of Oz's picture

because Cleveland sucks.

Wed, 08/08/2012 - 13:29 | 2688205 Hugh_Jorgan
Hugh_Jorgan's picture

No man it's; "Cleveland Rocks! Cleveland Rocks! Cleveland Rocks!" c'mon sing it!

Alright, I'll shut up...

Wed, 08/08/2012 - 11:03 | 2687669 LoneStarHog
Wed, 08/08/2012 - 11:07 | 2687675 Jlmadyson
Jlmadyson's picture

Nuclear indeed. You guys need to check out the latest cover of the trends journal. Sign of the times heh.

Wed, 08/08/2012 - 11:14 | 2687676 EL INDIO
EL INDIO's picture

Microwaves faster than photons ? !

 

I’m not a physicist but I do know that photons, microwaves or even TV and Radio waves are all the same thing: Electromagnetic waves of different frequencies.

 

That claim is false, the round trip for microwaves is the fastest is due to nature of the infrastructure and equipment: Transmitters, signal regenerators and the receivers.

 

Light or microwaves can do the 800 miles in … 4.26 micro seconds not milliseconds.

 

The transmission/reception equipment’s latency makes it milliseconds.

Wed, 08/08/2012 - 11:37 | 2687811 Joe Davola
Joe Davola's picture

In free space, yes all electromagnetic radiation travels at the speed of light.  Optical fibers are essentially a dielectric, and the larger the dielectric constant (index of refraction) the more it slows down the velocity.  Also with fibers (as any guided wave) the optical mode doesn't travel a straight line, but "bounces" back and forth from the guiding "walls".  Longer path, slower velocity.

Wed, 08/08/2012 - 11:52 | 2687849 EL INDIO
EL INDIO's picture

The time would still be in microseconds not milliseconds.

 

Besides, the microwaves are sent in the AIR, they travel at very close the speed of light. So what I said stands.

 

It’s a matter of equipment latency not speed of light or even electricity.

Wed, 08/08/2012 - 12:00 | 2687869 Joe Davola
Joe Davola's picture

(Edit to convert km to meters)

 

~1200 km is 1,200,000 meters / 3x10^8 meters/sec ~4 msec

 

Since this is broadcast over the air, one could do a man-in-the-middle attack to either front run or disrupt.  Just throwin' out that hypothetical.

Wed, 08/08/2012 - 12:13 | 2687924 EL INDIO
EL INDIO's picture

Haha, you got me dude.

 

I forgot to do the unit conversion.

 

What a doush.

 

(I apologise for my silly mistake)

Wed, 08/08/2012 - 12:24 | 2687966 Joe Davola
Joe Davola's picture

NP, did the same thing myself before correcting the post.  That's why my profs were always sticklers for showing the units during the calculations.

Wed, 08/08/2012 - 13:22 | 2688152 AlaricBalth
AlaricBalth's picture

Correct. Microwaves require a clear line of sight between antennas. A microwave beam can be deflected, just like light. And due to the fact that the wavelength of a microwave beam is longer than that of light, it makes it more sensitive to deflection. A kid with a large aluminum foil box kite and a long spool of fishing line, flown into the line of sight of a microwave beam could possibly make Tradeworx's $250,000 a year subscription worthless.

I'm jus sayin...

Wed, 08/08/2012 - 11:09 | 2687680 strongband
strongband's picture

Sorry to be contrary here, but if you think speed is the key to market freedom, get a loan and a subscription to Tradeworx and live what you would imply as happily ever after.

When hasn't the big bucks been ahead of the game in technology?? pretty sure those 1987 newfandangled C64 lookalike computers weren't in everyone's homes when the market started using them.

Wed, 08/08/2012 - 13:26 | 2688194 ParkAveFlasher
ParkAveFlasher's picture

This post convinced me to go out and get me one of these hi-grade modern HFT's thingamajigs and strap it on the ol' ticker.  What's that run in, VHF?  RCA plugs?

Wed, 08/08/2012 - 11:09 | 2687681 I am a Man I am...
I am a Man I am Forty's picture

Kaminsky just called bullshit on Meredith Whitney, basically saying the EXACT SAME THING I have been saying for the past year on these boards about municibal bonds, comparing it to mub like I have been doing for the past year.  Everyone of course junked me.  Live and learn, live and learn.

 

 

Wed, 08/08/2012 - 11:12 | 2687690 francis_sawyer
francis_sawyer's picture

So basically I'm SOL using my Paul Revere approach with a Commodore 64...

Wed, 08/08/2012 - 11:53 | 2687864 Turin Turambar
Turin Turambar's picture

Ahhh, the envy I had for people who owned commodore 64s! Me with my trs-80, 16k ram, no tape drive and chiclet keyboard.

Wed, 08/08/2012 - 12:04 | 2687899 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

+1 for the Commodore 64 reference.

Wed, 08/08/2012 - 12:33 | 2687994 Toolshed
Toolshed's picture

Pooh Pooh on Commodore and Radio Shack! And Texas Instruments and the Apple II for that matter!! Don't even get me started on the Sinclair. Atari computers were the shiizz baby! The Atari 800 with 48k RAM ruled the roost!

Wed, 08/08/2012 - 19:10 | 2689344 StychoKiller
StychoKiller's picture

I have a C-64, and this beauty: Hp85 (for controlling Hp measuring equipment!)

Wed, 08/08/2012 - 11:14 | 2687703 Dr. Engali
Dr. Engali's picture

It's too bad they aren't putting this to work for good use. It's kind of sickining the amount of resources they will go through just to skim a little before anybody else can.

Wed, 08/08/2012 - 11:23 | 2687732 Joe Davola
Joe Davola's picture

Stancil was on my thesis committee!  In spite of that dubious distinction, he knows what he's talking about.

Wed, 08/08/2012 - 11:28 | 2687759 mantrid
mantrid's picture

now completely dominated by robots which do nothing but accelerate and perpetuate momentum moves 

 

for decades it used to be dominated by fools which did nothing but accelerate and perpetuate momentum moves  manually but it didn't mean markets were broken or that it was wrong.

Wed, 08/08/2012 - 11:44 | 2687836 Brother Sebastian
Brother Sebastian's picture

Today's Huffington-Post article on HFT manipulators using drones:  http://www.huffingtonpost.com/mark-gongloff/high-frequency-trading-drones_b_1753160.html

Wed, 08/08/2012 - 11:57 | 2687867 ptoemmes
ptoemmes's picture

Deleted as dupe

Wed, 08/08/2012 - 12:27 | 2687973 Bartanist
Bartanist's picture

This article has brought to my mind the question of what really makes a market these days.

1. For sure central bank planning has to be the number one factor for the general direct of the market and indices

2. The second thing would be Wall Street and banker self interest. As Jim Cramer said in the his infamous interview with Aaron Task, it is not the company fundamentals that matter as much as the fundamentals and needs of those controlling the money.

3. The third thing would be computer control of price. Free market price discovery and fundamentals seeminly have no place in this market. Guaranteed liquidity and the need for the liquidity makers and underwriters to make a guaranteed profit have seemingly led to computer control of price... taking out the possibility of human error or laziness.

4. The fourth things would be a complicit network of sell-side analysts, hedge funds and mainstream media. They all spout the party line and if a rational person would normally think they opposite, they just repeat their unsupportable positions louder and louder.

Capital formation and free market price discovery seemingly have no place in THIS market. One wonders if they ever did ... or if it was just less obvious.

The world is truly upside down.

Wed, 08/08/2012 - 12:39 | 2688012 Aristophanes
Aristophanes's picture

I propose a very simple solution: Tax cancelled trades. 

If these guys want to spend billions trading faster, sure, go ahead.  If they earnestly "add liquidity", then great.  If however, they are just trying to screw everyone by having a few thousand "do-overs" per second, then they would be shut down. 

Taxing only cancelled orders won't hurt the vast majority of legitimate traders and will have almost zero effect on the little guy.

Am I being too simplistic here?  We all know that TPTB have little interest in playing fair.  Still I'm surprised that I have never seen this suggested by anyone else.

 

Wed, 08/08/2012 - 12:40 | 2688014 CVfriendship
CVfriendship's picture

Put. A. Minimum. Holding. Period. On. Stocks. Congress.

Kind of like how we put a maximum holding period on elected officials...but the opposite (this is so they'll understand it)...

But NYSE, CFTC, BATS FEAR the idea of their precious volumes declining further, hence we shall do what every great 'Merican company does....LOBBY!

 

Wed, 08/08/2012 - 12:51 | 2688055 svc101
svc101's picture

So, if the Cuban's can jam microwave xmissions (http://www.amigospais-guaracabuya.org/oagmc204.php), what prevents anyone else from severing this bankster link?

Wed, 08/08/2012 - 13:11 | 2688126 Joe Davola
Joe Davola's picture

You'd probably need to be close to the line of sight to the next tower with your countermeasure.  Probably easier and cheaper to just cut the power cord to the repeater station.

Wed, 08/08/2012 - 16:55 | 2688987 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

the towers have stand by power, batterys and generators. it would take more than just cutting the power

Wed, 08/08/2012 - 13:17 | 2688115 ThisIsBob
ThisIsBob's picture

I think this all started when a couple of guys got private telegraphs installed in offices with windows overlooking the Buttonwood tree.

Wed, 08/08/2012 - 13:30 | 2688215 CrawdadMan
CrawdadMan's picture

Don't be surprised when it's HFT'ers that find a way to pass the speed of light before the scientists at CERN do.

Wed, 08/08/2012 - 13:33 | 2688233 CrawdadMan
CrawdadMan's picture

And don't be surprised when NASDAQ is starts offering chip space for HFT machines to be embedded onto NASDAQ server's motherboard. 2-nanosecond latency!

 

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