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Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders
- cloudjacker 10y agoInteresting but remember when high frequency trading was news like 8 years ago?
- dahdum 10y agoIts invention, developed by the firm’s co-chief executive officers, Robert Mercer and Peter Brown, first sends an order to a central server, which breaks it up into multiple smaller orders. Those are then routed to venues that offer the best prices and most liquidity, much the same as brokers do now. But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along with instructions on the precise times they should be executed. The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it. A crucial part of the system is the optical, atomic or GPS clocks that will be used synchronize those orders. Renaissance says in its application that GPS clocks are accurate to within nanoseconds and any time differences between them are “too small to be perceived” by HFT firms. Maybe I'm missing something but sending orders ahead and releasing at a specific time is obvious is it not? If you add a really accurate clock suddenly it's patentable?
- kasey_junk 10y agoI havent read the patent but I can say this is an exceedingly common (I'd probably say standard) strategy. I can only assume the atomic clock bit is what's novel.
- tibbetts 10y agoUsing ntp or whatever the new variant is is also standard, which as I recall can hit sub-microsecond consistency on a wide area network with good hardware. So yeah, not new.
- sargun 10y agoPTP - Precision Time Protocol. https://en.wikipedia.org/wiki/Precision_Time_Protocol https://en.wikipedia.org/wiki/Precision_Time_Protocol. It requires hardware support, and a stable isolator inside of the machines.
- Unklejoe 10y agoIt doesn't require hardware, though it really improves the performance. I've implemented 1588 a few times and was able to achieve ~ <30ns accuracies when using hardware timestamping. Also note that there are more and more MACs and PHYs these days that offer HW timestamping. With software, it really depends on how deterministic your packet handling and timestamping routines are (or how deterministic the OS scheduler is). I was able to achieve accuracies of less than a microsecond on a Linux system, but it was "touchy". For reference, there's an open source implementation called "ptpd" and "ptpd2".
- phyalow 10y agoLittle know fact, you can use the GPS constellation to get atomic level precision time nearly anywhere on earth. Using an Atomic clock is purely to show off to investors/a red herring.
- adwf 10y agoI would've thought that GPS is too unreliable due to the deliberate inaccuracy? Only the US military have the clean signal. Particularly if you're using it to sync between two different time zones that could well be looking at different satellites. However, I don't know how much inaccuracy is introduced and whether it would have too much of an effect for the purposes of Google, et al.
- efaref 10y agoBill Clinton turned off the deliberate errors back in 2000: http://www.nytimes.com/2000/06/15/technology/pentagon-lets-civilians-use-the-best-gps-data.html?pagewanted=all http://www.nytimes.com/2000/06/15/technology/pentagon-lets-c... The errors you see in your mobile phone's positioning are due to signal problems (reflections, etc) and the relatively limited capabilities of the cheap GPS radio in your phone. A decent GPS receiver with a well-positioned antenna will get a highly accurate clock.
- homero 10y agoAnd with hft guarded so well, can't they just use the patent and not get caught?
- reddytowns 10y agoThe idea doesn't help the hft'ers. It takes an order, secretly transmits it to computers each as near to the major markets as possible, with instructions so that the computers submit the trade offer at precisely the same time. The hft'ers can't make money since they can't outrun trade offers that are synchronous across all markets.
- lsaferite 10y agoAs someone with zero domain knowledge, why aren't the exchanges already doing precision timed order processing? That just seems like it's should be a standard feature across the board. The broker sends buy/sell orders with planned execution times to all the required exchanges and the exchanges sit on the orders until the designated time.
- kasey_junk 10y agoExchanges do time ordered processing on their own exchange (with different levels of precision). I don't know of any exchanges that offer execution time as a constraint, but new order types can be created if they were deemed valuable (it takes SEC approval). That said, it wouldn't alleviate the issue necessarily. If firms detect problems in the clock sync between exchanges you are right back to the same problem, and now you've added a complex bit of tech that requires a bunch of competitors to agree on. This seems, to me at least, to be one of those problems that it is better to let the problem surface than to try to alleviate with an abstraction layer that is leaky and error prone.
- lsaferite 10y agoBut this technology is patent is just implementing the exact same thing at one layer removed from the exchange. You still have to time the orders and you still have to keep the timed orders confidential. To me, using a 3rd party to do this instead of having it as part of the base system is... silly I guess.
- kirrent 10y agoApparently the claimant doesn't believe so. The atomic clock isn't mentioned in all the independent claims.
- SEJeff 10y agoThe atomic clock bit isn't novel at all. I've worked for HFT firms the past 9ish years and using hardware timesources is 101 level intro to electronic trading.
- kasey_junk 10y agoBut atomic ones? We used ptp or gps for this sort of work but I don't know that I've seen an atomic clock.
- scottlocklin 10y agoThe actual patent talks a lot about NIST GPS clocks, and not so much about atomic clocks. Never trust a headline. Gell Mann Amnesia Effect in full play here.
- SEJeff 10y agoSure. You can't get roof access (for a gps antenna) or a vendor ptp feed in every exchange. In those places, you get a rubidium decay stratum 0 timesource. Not all businesses can afford this, but it is only 4 or 5x the price of a normal GPS timesource, which is affordable for the right people.
- cmdrfred 10y ago> The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it. That sort of sounds like DDOS to me. They patented a DDOS botnet.
- kasey_junk 10y agoNo its not at all like that. Its a synchronization strategy so that orders hit all exchanges at the same time.
- visarga 10y agoI assume the traders can't place orders with time of execution (to be executed at the specified time, kept secret until then). If the market accepted the time of execution from traders and kept the trades secret until they were executed, then there would be no need for these patents.
- kasey_junk 10y agoThere may be some exchanges that accept some sort of specialized order type that allows for time of execution as a constraint. That said, this issue is about synchronizing between exchanges and there certainly aren't any exchanges that collaborate to do that.
- rincebrain 10y agoThe way many patents are structured begins with "a method of..." So, in that sense, "a method of coordinating orders across exchanges to minimize analysis time available to other traders" seems perfectly in line. (I agree that from various computing-centric backgrounds, this might be trivial, but not all problem domains are well-saturated with computing expertise, and this might well be sufficiently novel to warrant a patent in the domain.)
- downandout 10y agoAll they're saying is that with absolute synchronicity among all of the clocks at all of their co-located servers, all pieces of the order are executed at multiple exchanges at precisely the same time. Even very small differences among the clocks at each one can create opportunity for others to step in front of the trade, and this helps them avoid that. While this may sound obvious, they wouldn't be doing it if it hadn't been a problem for them in the past.
- dietrichepp 10y agoNanosecond differences are too small to take advantage of, that's only 30cm. My guess is that you'd be at least in (or close to) the microsecond range before you'd worry about HFT stepping in front of your orders. If you're hitting multiple exchanges, then you can take milliseconds and still be fine.
- dsl 10y agoOne of the things HFT firms take advantage of is increasing a nanosecond lead into a microsecond (or more) lead by route optimization. If they can get information from one exchange to another faster than the original order, they can effectively trade by looking into the future. Many firms invest heavily in direct microwave links for paths normally served by fiber because of the speed advantage.
- kasey_junk 10y agoThose microwave routes operate at tens of millisecond advantages over the competing fiber routes. [edit] Completely wrong comment. The microwave link I was thinking of had a 2 milli advantage over the fiber link.
- chucksmash 10y agoSpeaking from ignorance here but 10s of milliseconds sounds way too high. This Wikipedia article [1] shows the standard Chicago to NJ connection at 14.5ms roundtrip and the dark fiber line Michael Lewis talks about in Flash Boys at 13ms. [1]: https://en.wikipedia.org/wiki/Spread_Networks https://en.wikipedia.org/wiki/Spread_Networks
- DigitalJack 10y agoNovelty and obviousness are more related to whether something has been patented already or not.
- ChuckMcM 10y agoUnfortunately for the traders, two of the clocks were at altitude and so time passed more slowly for them, resulting in several femptoseconds of misalignment :-)
- Johnie 10y agoYou joke, but Google actually uses GPS mounted on the roofs of their data centers for time synchronization.
- eru 10y agoGPS plus atomic clocks. And, boy, do the off-the-shelf commercial offerings suck. The vendors are not really used to dealing with the stress that Google puts these things under.
- toast0 10y agoI don't know why you need a great clock either, if you have stable, symmetric network paths from a central location to all your servers colocated at exchanges, you can predict the delay between sending from the server and getting to the exchange, you can split your order and send it to the various exchanges with appropriate delays and know that everything will arrive at the same time. If you're wrong, it's going to still be close enough that nobody will be able to see it on one exchange and react to it on another before your order gets there. This was the first thing I thought of when hearing the flash boys story on the radio: The banker was complaining he couldn't capture the whole book across exchanges because resting orders were cancelled before his order got there -- he just needs to get his orders to arrive close enough in time (although expect a bigger tick, probably)
- mortehu 10y agoThat exact strategy is also mentioned in Flash Boys, in the form of THOR. https://en.wikipedia.org/wiki/THOR_(trading_platform) https://en.wikipedia.org/wiki/THOR_(trading_platform)
- eru 10y agoKeep in mind that Flash Boys is not worth the paper it's printed on. (See https://www.goodreads.com/book/show/23570025-flash-boys https://www.goodreads.com/book/show/23570025-flash-boys)
- CelestialTeapot 10y agoIn any argument there is your side, their side, and the truth.
- syngrog66 10y agobeautifully said I've evolved to keep this rule in mind when I hear almost any story/portrayal/claim/news anymore. Especially anything that feels sensational or too-good-to-be-true-at-first. For example, people often lie about sex or money. National governments often lie about, well, pretty much anything that suits their best interests. When I say "lie" I don't mean completely wrong or totally false, merely, spun a certain way, sometimes a careful omission of critical modifiers, the use of weasel words, etc.
- ryporter 10y agoI agree. Atomic clocks are an implementation detail, and also overkill (at least during this decade). I've worked in HFT (albeit in forex, not stocks), and there are always internal delays within the exchange that you cannot predict with anywhere near the accuracy of an atomic clock. (Well, if you could, then that would be a true innovation.) Hedge Funds don't patent strategies. They keep them as trade secrets. It would make more sense to me if this filing was part of an attempt to build a patent portfolio for defensive purposes, as tech companies do.
- nsedlet 10y agoA few weird things stand out to me: (1) Renaissance is super secretive. If they want to use this strategy to make money, a patent reveals to competitors what they're doing and creates more issues than it seems to resolve. (2) Renaissance is an HFT firm. Why are they interested in thwarting HFT? (3) This really isn't that fancy an idea. It's fairly general: send orders ahead to co-located servers to be executed at specific times. I wonder if what they're really trying to do is prevent banks or others from creating anti-HFT infrastructure, and then providing it as a service to market participants that want to place large orders. The patent would perhaps provide some protection in that case.
- darawk 10y agoRenaissance is not that type of hft firm. Renaissance uses algorithms to predict price movements before they happen. The type of hft this system is designed to prevent is front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives. Those types of hft firms are surely eating into Renaissance's profits in a big way.
- harryh 10y agoIt's worth nothing that eating into Renaissance's profits in this way is good for everyone else because it means that accurate prices are reaching the market faster.
- deleted 10y ago[deleted]
- Dylan16807 10y agoI don't understand your argument. If a firm is able to consistently get to all the other exchanges first, they can shave pennies off of a large percent of orders. That's a pretty big downside for everyone that trades. They get accurate prices to the market faster, but only by a millisecond or so. That's a miniscule upside. How is the bad not a thousand times the good?
- hiou 10y agoSo one of the most famous HFTs is now going to offer a way to block the damage done by HFTs? Despite the hilarity of such a thing, is this a sign that HFT is not nearly as profitable as it once was?
- kasey_junk 10y agoProfits in HFT have always been oversold. These days the margins are brutally competitive. That said I have no idea why they would patent this. I can't see how they can make money from it.
- jcfrei 10y agoMaybe the idea is by now so commonly known that they simply try to license the tech?
- andyjdavis 10y agoIf nothing else, it could just be to stop anyone else from patenting something similar then trying to use that patent against them.
- mst 10y agoSo, in theory, you get perfectly timed execution. This assumes you're willing to trust their software and hardware. I suspect they're right that this is a far more effective and comprehensive approach than IEX. I think IEX is going to nail them to the wall because their target market understands and trusts a giant ball of cables having a particular length, but can achieve neither when faced with a giant ball of computer science. Other than the first sentence, this comment was about potential customer response; I don't have an educated opinion about how trustworthy and/or effective any given exchange software is.
- dsl 10y agoThey don't care about "target markets" or what anyone else thinks. This technology is to protect their own trades. The goal is to be able to execute buys across multiple exchanges (because the orders are so large) without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange.
- kasey_junk 10y ago> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders. HFT firms can have orders that have been resting for a very long time (days/weeks depending on the exchanges/risk rules) and you will never be able to get an order now in front of an order from last week, no matter how fast you are.
- WestCoastJustin 10y agoHighly recommend reading Flash Boys [1] and it explains why time is so important and HFT firms. Great book for filling in the picture of what HFT is and I found it pretty entertaining too. [1] https://www.amazon.ca/Flash-Boys-Michael-Lewis/dp/0393244660 https://www.amazon.ca/Flash-Boys-Michael-Lewis/dp/0393244660
- harryh 10y agoHighly recommend reading Flash Boys: Not So Fast [1] and it explains how Flash Boys gets it almost entirely wrong. [1] https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...
- WestCoastJustin 10y agoOh, thanks. Have not seen that and will check it out.
- bpchaps 10y agocomment was entirely irrelevant - deleting
- pgwhalen 10y agoDark Pools isn't by Michael Lewis, it's by Scott Patterson.
- Lagged2Death 10y agoWhen HFT was new, amateur forums that discussed it (like this one) were full of apologists saying that it didn't matter, it somehow didn't really effect the market. Some even claimed it made the market better. The tone of the conversation, the framing assumptions, seem different now.
- eru 10y agoInteresting. Around what time was that?
- pas 10y agoIt still doesn't matter much (it helps with price discovery, as HFT participants provide smaller spreads than traditional market makers, which helps with liquidity, and the volatility they add in case they withdraw from the market doesn't seem problematic, because when they withdraw they do so in order to prevent trading in very non-understood regimes, so they don't trade in chaos, wow, blame them, and/or ban them, but you lose the much greater benefit too). And yes, it's different, because when HN was new its comments were a lot more precise and fact-based, now it's full of dogmatic luddites.
- zouhair 10y agoIt seems I am the only one out here that thinks computer based trading should be illegal.
- pgwhalen 10y agoI'm curious what you mean by that. Should we go back to all gathering in the same room and shouting at each other?
- zouhair 10y agoActually it would be a good thing, we don't need a transaction every half a millisecond.
- andylei 10y agodo you think computer based retail sales should be illegal too.
- dsjoerg 10y agocould you explain why you think it should be illegal? what exactly do you mean by computer based? can i use a computer to help me decide what to trade? if the computer tells me what to trade and i press a button to agree with it and do the trade is that OK? sincerely trying to understand your perspective and how one might possibly implement it.
- jwatte 10y agoAn exchange could work just as well and provide just as much liquidity if it accepted sealed bids into a queue for one minute, then settled and showed the full queue, while accepting sealed bids for the next minute. HFT would no longer be a thing, and everyone would trade on more equal footing. ("One minute" is a guess. Could be right interval is 20 seconds or ten minutes or whatever... But needs to be slow enough to allow full dissemination and reasonable time for sealed bids.)
- kasey_junk 10y agoAnd how would that exchange handle tie breakers? Also what about cross exchange arb? You'll probably be interested in reading Eric Budish.
- jwatte 10y agoEverybody would see the arbitrage within the next trading cycle. So, rather than try to eliminate the arbitrage opportunity, put reaction times into a human time scale and let every actor share. Tie breaks can be fair split with cryptographically random split for the last share, for example. Yes, "all or nothing" would complicate, of it's still a necessity, but all those things are solvable, if we believe in fairness of markets and avoiding the next flash crash.
- kasey_junk 10y agoRandom split exchanges have been tried and are equally gamed. If your random split is based on order count companies stuff orders to gain an advantage. If it is based on qty its a pro rata market which are common. Having windowed auctions is also common. They are still latency sensitive as the entry/exit information is still subject to races. Budesh has a good paper outlining batch auctions and their advantages but it still doesn't account for the fact that cross exchange arb is still an issue.
- eru 10y ago> So, rather than try to eliminate the arbitrage opportunity, put reaction times into a human time scale and let every actor share. Why? We don't need a minimum wage for market makers.
- chflags 10y agoDoes RT still use mrsync? Great program.
- known 10y agoIsn't https://en.m.wikipedia.org/wiki/Information_asymmetry#Adverse_selection https://en.m.wikipedia.org/wiki/Information_asymmetry#Advers... better?
- 1024core 10y ago> its flagship Medallion Fund generate[d] average annual returns of 71.8 percent, before fees, from 1994 through mid-2014. Jeezus. That is about the same OOM as Moore's Law.
- HillaryBriss 10y agothanks for noticing/commenting on that return rate. humongous. i'm surprised no one else has mentioned it in the comments. for comparison, according to one source, over 50 years, Berkshire Hathaway grew at about 21 - 22% http://fortune.com/2015/02/28/berkshire-after-50-years/ http://fortune.com/2015/02/28/berkshire-after-50-years/
- mikeyouse 10y agoRenaissance also reportedly charges a 5% / 44% fee instead of the standard 2% / 20%. Quick math (which is wrong since they've changed their fee structure) -- If you had invested $1M with Renaissance in 1994, using a 5/44, you'd end up with something like $411M in 2014. Ren. would've made about $430M.
- Johnie 10y agoThis reminds me of how Google uses atomic clock and GPS for Spanner [1] Google: "“We can commit data at two different locations — say the West Coast [of the United States] and Europe — and still have some agreed upon ordering between them,” Fikes says, “So, if the West Coast write happens first and then the one in Europe happens, the whole system knows that — and there’s no possibility of them being viewed in a different order.”" Renaissance Technology: "Replete with schematic drawings, the filing describes a novel way for “executing synchronized trades in multiple exchanges.” The invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks -- precisely calibrated to vibrations of irradiated cesium atoms -- to sync orders to within a few billionths of a second." To translate what Renaissance is doing in technical parallel, they are trying to do a synchronous commit at multiple locations/exchanges at the same time. Submitting a trade to an exchange can be viewed similarly to committing data to a data center. By using atomic clock, synchronize these writes across multiple locations in effect eliminating HFT from jumping in. If anyone is looking into prior art on this, Spanner is probably the closest I can think of. (I am not a patent attorney and don't want to turn this into a patent debate). [1] http://www.theverge.com/2012/11/26/3692392/google-spanner-atomic-clocks-GPS http://www.theverge.com/2012/11/26/3692392/google-spanner-at...
- eru 10y agoThe whole scheme was already alluded to in Lamport's original paper. (Look for whenever he mentions `physical'.) http://research.microsoft.com/en-us/um/people/lamport/pubs/time-clocks.pdf http://research.microsoft.com/en-us/um/people/lamport/pubs/t...
- ovi256 10y agoGenerally speaking, as I'm not a patent lawyer either, the same technique applied to two different problem domains can generate two valid patents. The historical example is ship and automobile windscreen wiper.
- yandie 10y agoBut they're both in the software domain. Not to argue with you, but I don't see the problem any different from trying to synchronize two commits in a database. The same technique is not limited to Spanner or algorithmic trading, but other fields as well. It's not so much different from DHT or other algorithms, which have applications in multiple domains.
- dkersten 10y agoSo, when can we expect Amazon Elastic Atomic Clock (AWS EAC)? ;-)
- sseveran 10y agoI talked to a company recently that is working with Amazon to make a PTP feed available in EC2.
- lordnacho 10y agoHFT / Fund guy here. This is marketing spiel. If you just want to trade on a bunch of exchanges so no information flows between them, you can easily (TM) write a program that either a) lines up the orders at each exchange to execute at a specific time or b) delays the orders from a central server by the line delay. So say NYC is 13ms from Chicago. You want to hit both at once. As long as you're not 13 ms late, nobody can see your order in one place and react at the other. You don't need an atomic clock for that, NTP will do just fine. They're doing this because they have a reputation as a technologically advanced firm, and they know it will impress institutional investors, most of whom are still living in a time warp where spreadsheets are an advanced means of getting an edge over the market. They meet these guys, who are basically from another dimension of investing, and they suddenly need an explanation to their bosses of why RT can generate the most impressive returns of any strategy ever. The answer is "we have loads of PhD math geniuses building the strategies and amazing execution technology".
- Bromskloss 10y agoDoes RenTech still have investors? I thought they worked for themselves now.
- lordnacho 10y agoThey do, the famous fund is Medallion, which is internal only. There's other funds that aren't quite as sexy.
- Bromskloss 10y agoOh, I see. Why are they split up into multiple funds?
- brianchandbound 10y agoFunds can be split up for any number of reasons including investor specific requirements including leverage limits or volatility limits, etc. Also, more likely the case, their medallion fund strategies probably have some kind of capacity limit. I.e. Can't put too much capital into it before they start to suffer.
- oli5679 10y agoIf anyone hasn't already read Chris Stucchio's explanation of market-making/HFT, this is well worth a read. https://www.chrisstucchio.com/blog/2012/hft_apology.html https://www.chrisstucchio.com/blog/2012/hft_apology.html https://www.chrisstucchio.com/blog/2012/hft_apology2.html https://www.chrisstucchio.com/blog/2012/hft_apology2.html https://www.chrisstucchio.com/blog/2014/how_to_not_get_ripped_off_by_hft.html https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe... A basic summary is that market-makers add liquidity to the market and profit from their bid-ask spread, increasing the execution-speed and depth of the market. Many of the 'predatory' pricing strategies attributed to them by Lewis and others appear to be impossible when you try and write down the pseudo-code + order book that corresponds to the allegation.
- inthewoods 10y agoRenTec's Medallion Fund has obviously done amazingly well - almost to the point where one wonders how it is even remotely possible. But their other funds have had more average performance. Maybe this move isn't about Medallion at all - maybe it about getting to better execution for their other funds in order to improve returns.
- jsingleton 10y agoAtomic clocks have been in use in capital markets for a while. I was at National Physical Laboratory recently and they were demonstrating how they pipe their atomic clock output to the traders / exchanges. http://www.npl.co.uk/commercial-services/products-and-services/npltime/ http://www.npl.co.uk/commercial-services/products-and-servic...
- beezle 10y agoThere is nothing patentable in their application. All is obvious, not novel or has prior art. Case in point: gang switch in the era of voice brokers. Nothing says 'synchronized' execution better which is all this application is.
- kazinator 10y agoAtomic clocks? You can beat high-speed traders by only settling transactions, say, every five minutes. Whenever the time is nn:n5:00, look at the roster of orders and match bids with asks. Make it a complete black-box; no information is available about the current orders, only those from the previous five-minute period.