How To Profit From Planetary-Scale Computing 178
An anonymous reader writes "MIT physicist Alex Wissner-Gross and mathematician Cameron Freer have devised a technique for exploiting geographic location in high-frequency trading, reports FastCompany. From the article: 'We view this work as one of the first serious, credible justifications for covering the planet's surface with computers. [...] We've perhaps identified a new type of natural resources that sovereignties might take advantage of.' Physicist and hedge-fund manager Jean-Philippe Bouchaud says, 'This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits.'"
Seems completely stupid. (Score:2, Insightful)
This doesn't create any value for anyone.
...serious, credible justifications... (Score:2, Insightful)
I would say anyone knowledgeable and not directly benefiting from HFT would rather take this as a serious, credible justification to ban this tax on serious, honest investors.
But Wallstreet's buddies in Washington will make sure this won't happen until another flash crash takes the DOW pinning for the Fjords.
Hope you voted for change and hope, lulz.
Re:Seems completely stupid. (Score:1, Insightful)
Well they call it "a new type of natural resources" which sounds positive until you realize that they mean a new habitat for blood-sucking leaches.
Silly flat-earthers! (Score:5, Insightful)
You're thinking too two-dimensionally. Think carefully: what location minimizes the average distance to every spot on the Earth's surface? I'll tell you right now it's not in Siberia! But you should probably spend some extra money on the air conditioning system for your server farm if you want to set up shop there.
Re:Increases liquidity at what cost? (Score:1, Insightful)
The thing is, arbitrage doesn't create liquidity, it simply capitalizes on the mistakes other people make. If someone shows up selling cotton 10 cents cheaper than everyone else, buying all the cotton and selling it to someone at regular price doesn't really create any true liquidity... sure the "volume" has doubled but that's just because you've become a middle man buying and reselling in the middle of a transaction that would have completed anyway.
Re:Limits? (Score:1, Insightful)
To complete your argument you have to prove that profitable trading requires information transfer. Maybe it's possible to make money from mere FTL correlations?
Time for a rant... (Score:3, Insightful)
God dammit! I'm pissed off again.. I'm pissed off because everyone wants to 'study' HFT or 'discuss' HFT.. and no one seems to understand the big picture! HFT is ruining the fucking stock market. HFT is destroying the opportunities for the middle class.. destroying their retirements.. and ruining the confidence in the market. HFT is making the criminally rich even richer! Everyone likes to talk about HFT and bitch about it - and the people that benefit most from total stupidity that is HFT are the ones that get to enact the policy through lobbying and backroom revolving-door politics.
HFT does one thing... It exploits the gaps in bid and ask price during execution to make money off the actual market orders. But, if the market is no longer correctly offering 'market' prices because of instantly-changing outside influences, how the fuck is it still a market and not a scam? The only people saying HFT is a good thing are the people benefiting from HFT.
There's tons of easy ways to fix the problems created by HFT exploiting.. Here's a few ideas:
1. random delay.. Issue an 'instantaneous' delay in ALL trade execution from all firms. In essence.. make the delay long enough to completely ruin HFT but short enough that no human executing a trade would ever be affected.
2. trading tax.. Tax all trades by a negligible amount. Firms that actually invest will not be affected.
IMO, this article is yet another example of solutions for a problem by exacerbating the problem.. So, fuck you, MIT physicist Alex Wissner-Gross and mathematician Cameron Freer.
Re:Increases liquidity at what cost? (Score:4, Insightful)
How about this as a backup...
Investment doesn't, in and of itself, create wealth. Investment is putting money in the hands of people who CAN create wealth, but don't have enough money to do so on their own. The idea is that the investers should be rewarded for taking the financial gamble, and the people they invested in should be rewarded for having created something valuable.
High Frequency Trading screws them both.
High Frequency Trading is anathema to the very concept of investment - and the stock market.
We'd all be better off if the HFT people simply went to the races, instead.
Re:Another way to look at this: (Score:4, Insightful)
what's the betting that our elected representatives can?
Don't worry, they have lobbyists to help them.
This is a great plan! (Score:2, Insightful)
Step 1: get all the people responsible for HFT to move to a base at the bottom of the ocean.
Step 2: turn off the oxygen.
Step 3: Celebrate, then start thinking of how to get all the lawyers to move to Siberia as well.
Re:Limits? (Score:3, Insightful)
These guys go too far. One of these days we'll have botnets doing trading with funds from sniffed credit/debit info. They could even pay back what they took... then profits get dumped anonymously to campaign funds. Botnets do get free-speech rights don't they?? (they may have an opinion on capital gains taxes, or want to own broadcast stations)
If it makes anyone feel better, call that pile of computers a bank and lend it some "government" money
Trading in those strange mortgage death futures is too risky, botnet futures are the new thing.
Cylons and Skynet Terminators will have their own electronic religion making them tax exempt.
That people are doing this is a sign of a broken fiancial system (as if fiat currency based on debt didn't already establish that). They are not producing anything. They are buying low and selling high units of wealth that others have produced. They are not creating wealth, they are redistributing it.
This is the kind of shit that has madmen and economists thinking you can forever grow an economy in a finite world with finite resources. It's also the kind of shit that encourages people to view stocks as a way to gamble and not as investments. You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.
Anyone else find that line in the summary amusing:
Yeah, computers and networks are a "natural resource". In fact I have a few growing in my backyard. I just have to water them from time to time. Really, WTF?
Re:HFT is Not a Sin (Score:3, Insightful)
They're buying something in one place that they believe will grow in value at another place. Isn't this the goal of all trade?
Suppose I got to the store to buy a bag of chips. I pick up the last bag from the shelf and go to buy it. You jump in front, grab the chips from from me, pay the guy and then tell me that you'll sell me the chips to me for only a dollar more than the price on the shelf.
Who has benefited from this other than the thieving scum who got in the way of my trade with the store owner?
Re:HFT is Not a Sin (Score:5, Insightful)
Yes it IS a sin.
It's a SIN because the heads of NYSE and NASDAQ continue to spread this lie that HFT shops contribute liquidity to the system. THEY DO ANYTHING BUT!
Have you seen the offices these HFT shops rent out in New Jersey and CT? They're cheap Class B space, warehouse loft and other low-rent space. They don't have the capital it takes to be a market maker. They just have capital---and they aren't going to sit in the market when it is hurting and make trades no sane person would make to keep liquidity flowing.
That is the job of a REAL market-maker. A market-maker will step in and be the counterparty to keep the issues they are responsible on the exchange moving.
What the fuck do you think happened on the May 6 flash crash? Almost all the HFT shops ran to their server rooms and SIGSEGV their software and pulled out to avoid taking more pain. The bids all dried up on the NYSE which is why the first crazy market order for $0.01 a share came to the exchanges, NASDAQ cleared it so for a while, several stocks were at zero print... like Accenture.
When you have the most top companies on your exchange printing zero in the flash of an eye... YOUR MARKET IS BROKEN. How is this even debatable?
Why would I want to put the kids college fund money in this fucking disaster?
HFT sucks.
Re:HFT is Not a Sin (Score:5, Insightful)
Another lie the chairs of NASDAQ and NYSE love to tell the world is that HFT speeds up price discovery.
How is this even POSSIBLY true??? They are algos. Those algos don't have any clue what the future performance of a company is. The algos are not going to tell you how successful AAPL's iPhone 5 will be, or when the next class action lawsuit is coming.
And algos break ALL THE TIME. It has been happening more often these days because stocks are breaking 120DMA more often, and most of these algos are doing nothing but backtracing trends on top of their arbitrage schemes. When a big investor comes in the room, they jump on him like nervous poodles.
That's why the May 6 event was such an eye opener. Waddle and Reed didn't cause the flash crash. They executed a normal transaction that wasn't even a Big Fish transaction, and all the algos went haywire.
So much for the quants and their MIT-smartness.
Re:The utility of arbitrage (Score:3, Insightful)
Nonsense. Businesses in your example introduce value, by taking care of shipping the products to/from the place of production to the place of sale. It's not statistical arbitrage at all, which alone creates no value, only number games.
There is no economic point in buying/selling a product in a factory without it ever leaving the factory.
Re:Increases liquidity at what cost? (Score:4, Insightful)
"I don't get why we can't even just have one-day ticks."
I used to think the same, but now I feel some things are still untied.
"Every day an order book accumulates, and at 5PM the exchange executes everything at the price that generates the most volume."
It still would make it worth waiting to 4PM to order in case there are interesting late news. And then waiting till 4:50, 4:59, 4:59:59...
"Within a price orders are executed in random order."
Then I'd make sure not to issue a 10 million dollars order but 10 million orders for one dollar (or a cent, or a millicent or whatever is the lowest order).
"the insiders don't have nearly the same advantage (getting news 15 minutes early can make a HUGE difference today)"
But insiders still could take advantage of news produced at 4:59 that, depending on the system other couldn't take advantage of.
"You could even make the trade settlement time midnight or something like that so that it is well after the business day so that last-minute news has more time to get around."
You know the world is round and economy is global, don't you?
Re:HFT is Not a Sin (Score:4, Insightful)
Uh, no. The goal of all trade is to allocate capital to the institutions most likely to create value. HFTs don't give a shit who creates value. They don't allocate capital based on which companies are useful. They are a transactional cost paid by everyone else. They are best approximated not as a trade, but as a tax, albeit one that does absolutely nothing for the public good. The value removed from the markets by HFT is value extraction, not creation. This is a fundamental difference from everyone else playing.
Re:Limits? (Score:4, Insightful)
You know how you can avoid ever having a huge national housing market crash? Easy. Limit the purchasing of non-commercial residential homes to people who actually intend to live in them. Do that and DON'T make "securities" out of them. Then you can't have a bubble in the first place -- no bubble, no burst.
What do you do with all the people renting investment properties now because they are not in a position to buy a home? If it wasn't for people investing in property there would be no rental market. I agree with you in principle but adjusting one thing has an effect on others. Solving the next problem then becomes the issue.
Trading is competitive (Score:5, Insightful)
A) Require 1/2 hour averaging for all trades.
B) Tax all automated computer trades at 1%.
Result - trading moves to another exchange where this is not required. Your solutions depend on international cooperation between government and exchanges, all of which compete with each other. Good freaking luck getting policies like that instituted.
Re:Time for a rant... (Score:3, Insightful)
+1
After interviewing with an HFT firm in Chicago and understanding how their business worked (I was to work with the CTO to help squeeze every last microsecond out of their trading infrastructure colo'd at markets around the world), I cashed my entire 401k/IRAs out of the stock market. I might as well go to a casino.
Re:Increases liquidity at what cost? (Score:1, Insightful)
Adding a tick rate is probably the most obvious way to reduce liquidity, it's a horrible idea.
It's definitely an obvious idea. If it were any good, the investor community (pensions, mutual funds, non-quant hedge funds) would be lobbying for it. They're not. The reality is, high-speed computer trading has given investors the best deal of their lives in terms of execution prices and ability to make large trades.
The only people screaming about high-frequency trading are the human market makers who've been left in the dust by their silicon counterparts.
Re:Limits? (Score:3, Insightful)
No, what would happen is the lender would sell off that loan into a CMBS ( Commerical Mortgage Back Security). That CMBS would still be tranched out based on the risks of the asset pool ( it's not divided into shares ). And those tranches would be bought by any number of clients.
You seem to think the concept of Asset Backed Securities lead to the housing collapse. What lead to the housing collapse was simply banks giving loans they shouldn't have. Requiring 40% cash down on housing loans would have been another easy way to avoid all the problems.
Re:Limits? (Score:3, Insightful)
Umm, you can. Sure, there are far too many people getting paid well for completely non-productive work, but if I spend two weeks creating a compiler that makes me and my team twice as efficient I have not detracted from anyone else, but have grown the productive capacity of the world by a small amount. Economics is not a zero sum game.
Additionally, those "finite resources" you mention include the 120-odd petawatts of solar energy slamming into the Earth, and the massive tidal energies caused by the Moon's influence. Whilst both those are technically finite, they are not so in the context of this conversation. Any of that energy used for productive use is completely additive, taking away nothing.
I know I'm focusing on just one small aspect of your post, but this idea that economics is zero-sum and that there isn't real productive growth going on needs to be stomped.
Re:Trading is competitive (Score:2, Insightful)
There are two kinds of investors on an exchange, people with and without patience. The one with patience will put a buy/sell order at a price and waits for someone without patience to trade against it. A market maker will trade against both people and offer a better market for both.
I suggest you go play eve online for a while and see why market makers and arbitrators are so important.
Re:Trading is competitive (Score:1, Insightful)
A) Require 1/2 hour averaging for all trades.
B) Tax all automated computer trades at 1%.
Result - trading moves to another exchange where this is not required. Your solutions depend on international cooperation between government and exchanges, all of which compete with each other. Good freaking luck getting policies like that instituted.
Actually not, as serious investors would avoid the robot dominated exchanges like hell.
Re:Increases liquidity at what cost? (Score:3, Insightful)
But that was really my point. If the goal is to create wealth, anything that "disrupts" the flow of money between the wealth creators and the investors is counter-productive. Any "inefficiency" in that flow impairs the creation of wealth.
Re:Time for a rant... (Score:1, Insightful)
i read TFA and i dont really like what they are doing, but to be honest im more disturbed by your post. people like you have more potential to ruin the market than these poor assholes do. (HFT is a crowded space that will die its own death soon enough, imo.)
"make the delay long enough to completely ruin HFT but short enough that no human executing a trade would ever be affected."
if you have ever had to trade for a large pension fund manager (say 30 plus sponsors accounts that all need to be traded at the same time with different domicile based restrictions and cash constraints) trust me you want to know where the bids and offers are NOW and of course you will benefit from modern machine support. there is a time and place for trading by hand, but overall its good to be able to set things up in an algo and watch the bigger picture, dealing with the chunkier or harder parts of the trade. sometimes you need to spend more time making sure your cash constraints are kept tightly or that you are getting enough of the illiquid stocks done, not manually sending out orders in MSFT and IBM to the market line by line. if the exchanges or regulators ever do cower to the populist banter from people that REALLY cant see the big picture, it will hurt a lot of people that have nothing to do with high frequency "stab art".
"trading tax... Firms that actually invest will not be affected."
you have to be fcking joking. take a look at any market with stamp. HFT and other arb guys who move fast learn how to get around it (ever heard of trading on swap?) and guess who is the only ones left actually paying stamp? yup. real investment firms.
sorry you fail. stick to what you know. your rant would be like me ranting on your warcraft or whatever.
Re:Increases liquidity at what cost? (Score:1, Insightful)
I used to think that as well, but then...
- Trade every hour: so no one places they bids until 59min and 59 seconds past the hour.....
- Trade 24/7, this already effectively happens with after-hours trading and the different markets around the world
- Trade is split into small units, again, this effectively happens already when they match large orders to sellers. I may place a bid for 1m shares but I won't be buying it all from the same person, the computers already work their magic to break down the orders and match sellers at certain prices.
HFT doesn't seem to do much other than skim money off the top, but it does provide liquidity to the markets, and unfortunately is where you will logically end up if you have a market of any kind (i.e. to get maximum benifit you have to be the quickest to respond, putting an arbitrary time in place for the trades only means that you can make money, say 24 times a day, rather than a lot more, and just artificially slows down market movements which can cause more problems than it solves).
In case you are interested, there is a article here about what happened when the market crashed recently and everyone blamed the programs, seems that it really was the old problem of stupid humans.....
http://www.businessinsider.com/read-the-email-hft-chairman-is-forwarding-around-about-the-firm-that-caused-flash-crash-2010-10
Re:Limits? (Score:3, Insightful)
The are producing something, liquidity. Liquidity has value. It's like saying cab drivers don't do "real" work, they just redistribute people who do.