Trading Shares in Milliseconds

December 23rd, 2009

I like the part about how NASDAQ is looking at requiring all brokers to use a specified length of network cable on the links to the exchange’s servers. HA.

The article assumes the reader will get it, but just in case you don’t, the point is that the length of the cable affects the latency. A shorter cable will have shorter latency. A longer cable will have longer latency. As absurd as it sounds, the speed of light is a factor to consider for these strategies. (More information on latency issues as they relate to trading.)

Via: Technology Review:

Today’s stock market has become a world of automated transactions executed at lightning speed. This high-frequency trading could make the financial system more efficient, but it could also turn small mistakes into catastrophes.

If Manoj Narang is about to bring down the markets, he’s certainly relaxed about it. Narang, who wears a goatee and wire-frame glasses, is casually dressed in a brown shirt and dark gray sweatshirt. Sitting on a swivel chair with one leg tucked under the other, he seems positively composed, especially for a man who has just bought and sold 15 million shares with a total value of $600 million. For Narang, however, such volume represents just the start of a normal day. Though it’s about noon on a Friday morning, he has barely begun.

Narang is the head of Tradeworx, a hedge fund and financial-technology firm that makes purely automated trades; all decisions are reached and acted on at near light speed by computers running preprogrammed algorithms. “Actually, we run two businesses,” he says. “The first trades in and out of shares in about a second and holds them for an average of two or three days. That’s the medium-speed fund. The high-speed fund could make thousands of trades a second and holds them for a matter of minutes.”

By the end of the day, his computers will have bought and sold about 60 million to 80 million shares, with the heaviest activity in the last hour of trading, from three to four in the afternoon. Tradeworx and similar firms around the country will race to close billions of bets that hinge on things like tiny differences between the prices of shares in an exchange-traded fund holding the S&P 500 and the individual shares that make up the same index. The profits go to the company with the fastest hardware and the best algorithms–advantages that enable it to spot and exploit subtle market patterns ahead of everyone else. At the end of a typical day, the Tradeworx high-speed business holds no shares at all. Come Monday, Narang will look to trade millions more shares. It seems like a lot, and it is, but Narang estimates that he’s probably only somewhere in the middle of the top 50 traders by volume.

Just five years ago, automated trades made up about 30 percent of the market, and few of those moved as quickly as today’s trades do. Since then, however, automated trading has become much more widespread, and much quicker. Narang acknowledges starting his ultrafast group as a defensive maneuver when he began to notice faster traders eroding the performance of his medium-speed strategy. Now the medium-speed fund is adopting the techniques he developed in the ultrafast fund.

TheTabb Group, a consultancy based in Westborough, MA, estimates that high-frequency automated trading now accounts for 61 percent of the more than 10 billion shares traded daily across the numerous exchanges that make up the U.S. market. Tabb estimates profits from high-frequency trading in the first nine months of last year at $8 billion or more. With the rise of automation, the bulk of U.S. stock trading has moved from the once-crowded floor of Manhattan’s New York Stock Exchange (NYSE) to silent server farms run by exchanges and broker-dealers across the country: the proportion of all trades that the NYSE handles has shrunk from 80 percent in 2005 to 40 percent today. Trading is now essentially a virtual art, and its practitioners put such a premium on speed that NASDAQ has considered issuing equal 100-foot lengths of cable to the brokers who send orders to its exchange servers.

6 Responses to “Trading Shares in Milliseconds”

  1. LykeX Says:

    Man, this shit is tricky.

    As far as I’ve gathered, the stock market is more about mass psychology than actual real life value. In other words, the deciding factor is perceived value, rather than real value.

    I keep feeling like I have a lot of questions on this matter, but I can’t quite put them into words. I continually wish I knew more about modern economy.

    So, I’ll settle for a few easy questions:

    Wouldn’t it be cool to do a Tyler Durden?

    Wouldn’t it be a neat idea to restrict trading activity to non-augmented human beings?

    Wouldn’t it be nice if we could get on a spaceship and leave this sick, sad world?

  2. Kevin Says:

    Mass psychology—of the machines competing against each other in autonomous mode…

  3. JWSmythe Says:

    LykeX,

    You’re totally right. I’m not a stock trader, but I’ve known some, and I had dabbled in it in the past, and analyzed how it worked for people that were still doing it.

    A completely worthless company, with no product can have wild fluctuations in value just because someone believes they’ll do well. Sometimes it just takes someone “leaking” word that they have some earth changing product about to be announced, and the value will go up. It’ll go right back down when people realize there’s nothing to it. That’s the whole concept behind the “pump and dump” scams.

    What are the computers trading? Requests by users on the off-hours, and predictive trades that their systems believe will be profitable. Frequently, your trade comes down to milliseconds (the idea of the story) between the time that a bunch of buy’s happen, and the point where it’s saturated, and folks begin to sell at the predetermined limits.

    That’s why pump and dump works. The online brokers let you set your buy and sell limits (or at least they used to), so I could buy a bunch of XYZ at $0.01/share, sneak the word out to the right folks, and spam the crap out of the Internet saying “Buy XYZ, they have [something great happening]” Over the next few days, there’ll be a rush on XYZ, and when I believe it’s close to it’s peak, I sell every share I have. Voila, I’ve made a fortune, and it’s the suckers who bought it at the peak who are screwed.

    What’s the big difference between a pump and dump scam, and one of the major networks financial news hour recommending buying a company? Nothing, except the network news route is still legal.

    That was mirrored in the housing bubble collapse too. “Buy houses, they always increase in value”. Now, everyone who bought or refinanced at the peak are in foreclosure, with no option to sell.

    I have a friend who moved while things were still on the way up. He did so because of his job, not as an investment. He bought a house for $400k, which should have gone to about $700k by now at the trend at the time. He doesn’t live in it any more, and has been trying to get rid of it for over a year. The bank agreed to let him short sell at $150k, and even still he can’t move it. It’s not one of those overpriced crappy homes that was the bubble. It was actually a very nice home. Now he can’t even give it away.

    I saw this coming a long time ago, when I moved to Los Angeles. I was told by people there, “Buy a house. Don’t worry what it costs. The value doubles every year, so you just refinance every year and keep enough from the refi to make the payments.” I told them that a system like that is impossible to sustain. Several years later, they’re losing their houses. I hope they enjoy their nice cars and those trips were worth it, (paid for with the refi money) because that’s all they have left. Where I was, it was impossible to find anything decent for under $700k. I refused to buy because *I* couldn’t sustain those payments. Forget the fact that they promised the value would go up and I could refi.

    … and Tyler Durden was a nutjob. 🙂 That plan wouldn’t work anyways. The data isn’t all kept in their buildings. It’s distributed throughout backup locations that you’d never find out about. Sure, you could flood Iron Mountain, but you wouldn’t know if company X had an office in Nebraska where their offsite backups were housed.

    … and … explosives aren’t always the answer. I like a big explosion just as much as any other guy with a touch of pyromania. 🙂 Blowing up buildings of companies that you believe have done you wrong won’t accomplish the goal you expect. They actually run a bigger risk of hurting innocent people, which I really don’t believe in. In the scenario of the movie, while they were suppose to have evacuated the building security and janitorial staff, there’s still a risk of some innocent office worker sitting at his or her desk trying to keep their job by working 18 hour days for 8 hour days salary. Those are unacceptable losses. Beyond that, unless it’s insanely planned, tall buildings lean when collapsing, and debris is blown for blocks. That means people sleeping in their apartments and folks driving are at risk. In a major metro area, you’d likely take out a few cab drivers who were working hard for low pay to support their families. Not a good plan. Besides law enforcement coming after you, Karma is a bitch.

  4. dagobaz Says:

    The problem with high speed algos running on black servers is simply that the complexity of the bots exceeds human abilities to control. Ultimately, some black swan event will cause a mass move, a migration if you will, and that will prove to be impossible to control. Even with those vaunted circuit breakers. I see a lock-limit move occurring each day in milliseconds for a protracted period of days.

    Personally, my time frame for trade duration is < 1 hour, and only rarely do I see overt manipulation in my venue. The rise of the bots, along with the decline of the honesty of the paper are why I no longer trade equities, at all.

    It's getting simply surreal, out there.

    cybele

  5. soothing hex Says:

    Re : the Tyler Durden attack.

    Even though I don’t have these skills (lucky me), I’d guess a cyber attack would be way more efficient : first you’d have a better knowledge of what you’re trying to go against, and then you’d have way more options to bring the structure down than just blowing it up.

    Now what good would such an operation make ? Major chills. Attention is focused. The pyramidal structure would stay, in my opinion : for the whole balunga to keep on going, the main hierarchies must remain, and be sure that consumers and expoiters alike want the show to go on.

    So what to do to overthrow this economic system ? I kinda feel like a disclaimer but well : go for autonomy. Favor gift economy. Experiment these in a networked world.

    Market disruption and T.D. ops are tactical tools to use appropriately.

    http://www.dailymotion.com/vid.....live_music

  6. LykeX Says:

    Hmm, I wrote that post while in a very frustrated frame of mind. Just to reassure you; I’m not actually planning to blow up any buildings 🙂

    It’s just that I’m stuck with this feeling that there’s something going on that could have major effects on my life, I don’t understand what it is, and I don’t even know enough about it to ask the proper questions.
    It’s a very dis-empowering feeling.

    Anyway, thanks for taking the time, guys.

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