7 ms·

Markets stay synchronized via continuous arbitrage. US equity trading centers in New York while options trading centers in Chicago. Slowing the data transmiss

by OldHand2018 8y ago

Markets stay synchronized via continuous arbitrage. US equity trading centers in New York while options trading centers in Chicago. Slowing the data transmission to the Cboe data center in New Jersey slows its transmission to Chicago, and thus provides increased opportunity for HFT traders to earn money. If you value fairness, this is a bad thing.

mlevental 8y ago
>HFT traders to earn money. If you value fairness, this is a bad thing. fairness for whom? hfts compete with other hfts not retail investors.
- KMag 8y ago
  Those with short-term information are the ones who benefit most by increases in the time taken to disseminate information. Let's say some fund's AI parses and interprets a favorable article 25 ms before anyone else. They start simultaneously buying stocks in NYC while writing puts and buying calls in Chicago. Moisture in NJ slows down news from Chicago to NYC by 2 ms. Automatic market making algorithms in NYC, in the absence of evidence from the options markets, bet on mean reversion and don't adjust their bids and asks as quickly as they would had information arrived from Chicago. In those 2 ms, two investors each sell 100 shares a penny cheaper than they would have otherwise to the institutional investor with the news-reading AI. A retired teacher and traditional hedge fund manager are each $1 poorer and someone writing a newsreading bot is $2 richer than they would have been had NJ been drier. The individual stories are pretty boring, but millions of times a day, a small short-term information edge is slightly more valuable. Sure, 99% of the time both the winners and the losers are institutional investors. However, if you just look at a retail investor (or some institutional investor representing mostly retail investors), they're almost never on the side with a short-term informational advantage. On the one hand, it's 99% just institutions winning and institutions losing. But, when you zoom in on those 1% of cases where an unwitting retail investor got lucky or got unlucky, there's a bias in their luck due to their lack of valuable short-term information. On the other hand, those 2 ms might also mean that if a big retirement fund is unloading $10 million in stock to a bank, that bank has an extra 2 ms to simultaneously start selling the stock and get short in the options market before the low-latency market makers adjust prices. Maybe this means the bank is willing to bid $2 higher for the retirement fund's block trade. In any case, the actions of the HFTs have both positive and negative knock-on effects for ordinary retail investors, even if other HFTs account for the vast majority of the HFTs' profit margins. Sometimes the short-term information comes from the outside world, and sometimes it comes from institutional investors trying not to telegraph their moves on behalf of retail investors.
coldtea 8y ago
Bids should be made only through a turn-based system, with ample time to delete any advantage (or harm) from "data transmission" delays (1 minute for example).
- Jedi72 8y ago
  This makes a lot of sense to me. What actual economic value is being captured by HFT?
  - auntienomen 8y ago
    They are paid to take on risk. Same deal as insurance, really.
    - mrchicity 8y ago
      Insurance is an apt analogy. Intuitively, if someone consistently makes money, they're just skimming without providing any value. People were astonished that Virtu made money almost every day, but wouldn't care if GEICO made money almost every day. In statistical expectation, you are better off not selling your stock to an HFT market maker. They are only buying from you, on average, when the spread you pay is more than they expect the stock to move. You could wait and sell to someone else for a tiny bit more, on average. In statistical expectation, you are better off not insuring your car. The insurance company writes the policy such that their expected payout over its lifetime is less than the premiums they collect. But real people don't live in the world of maximizing expected value. The guy selling his stocks is doing it a couple times a year, and doesn't want to risk losing a few % if the market gaps down, just to make a tenth of a penny more in expectation. Nobody wants to take out another car loan if their shiny new SUV gets hit driving out of the dealership. Bearing risks people don't want is valuable. So bizarrely, while these services may satisfy a need, consumers are only really happy when the provider loses. Nobody looks back on decades of crash-free driving reminiscing about paying those insurance premiums. Nobody likes to sell stock and see it tick up. (And I'm hand waving assuming you're a randomly selected trader or driver. If you have inside information, trading with anyone is positive EV. If you drive drunk at 100mph but have no tickets or DUIs on your record, insuring your car is positive EV. I'm also hand waving away comparative advantage. That better price an HFT market maker gets when turning over your trade may not be achievable for you. Maybe they can trade on more exchanges or predict prices better to get out at the right time. They do this all day so trading optimally is not a waste of their time, but it's probably a waste of yours. In that case, you may lose more and take more risk doing it yourself. I think that's closer to reality.)
Applejinx 8y ago
Is 'earn' a valid word here? Asking people who are NOT direct benificiaries of this behavior.
- hueving 8y ago
  Yes, they are taking on risks by making these trades. Do insurance companies 'earn' money? Do bail bondsmen 'earn' money? Does a retirement account 'earn' money?
  - mikekchar 8y ago
    The definition that google returns for the word "earn" is: 1. obtain (money) in return for labour or services. 2. gain deservedly in return for one's behaviour or achievements. I think it's interesting to see the contrast in those 2 definitions. In the first place you concern yourself with whether or not a service has been performed. In the second place you concern yourself whether or not the money is deserved by way of the action/accomplishment. I think this neatly separates the two kinds of thinking on this sort of topic. On the one hand, people are appalled that people are making a lot of money without providing any particularly useful service (in the case of HFT, I suppose we could argue that it increases liquidity, which is helpful in some ways, but the market had ways of dealing with that before HFT so I think it's not a super strong argument). On the other hand, there are people who admire the cleverness, skill, impetus and daring of people who can find ways to make money without providing some kind of traditional service. To those people, the money has been earned by virtue of their ingenuity/initiative/luck. I think the conflict here is that to many people, the world would be a better place if we valued #1 considerably more than we value #2 (possibly to the point of not valuing #2 at all). It is, of course, not the world we currently live in, but I can understand the sentiment.
    - hueving 8y ago
      Hft does provide a service: taking on financial risk. This is a hard concept for people not in finance to understand, but think of it like insurance if that helps you.
lainga 8y ago
I thought I saw a bunch of guys on a rooftop in Jersey City with silver iodide rockets.
- reaperducer 8y ago
  Those mylar Happy Birthday balloons are ideal for wreaking havoc on telecom networks. Tie one with a long string to the fence around a remote earthstation or microwave horn, and let the breeze cause random outages. Hold on, someone's banging on my door... NO CARRIER

mlevental 8y ago

>HFT traders to earn money. If you value fairness, this is a bad thing. fairness for whom? hfts compete with other hfts not retail investors.

KMag 8y ago
Those with short-term information are the ones who benefit most by increases in the time taken to disseminate information. Let's say some fund's AI parses and interprets a favorable article 25 ms before anyone else. They start simultaneously buying stocks in NYC while writing puts and buying calls in Chicago. Moisture in NJ slows down news from Chicago to NYC by 2 ms. Automatic market making algorithms in NYC, in the absence of evidence from the options markets, bet on mean reversion and don't adjust their bids and asks as quickly as they would had information arrived from Chicago. In those 2 ms, two investors each sell 100 shares a penny cheaper than they would have otherwise to the institutional investor with the news-reading AI. A retired teacher and traditional hedge fund manager are each $1 poorer and someone writing a newsreading bot is $2 richer than they would have been had NJ been drier. The individual stories are pretty boring, but millions of times a day, a small short-term information edge is slightly more valuable. Sure, 99% of the time both the winners and the losers are institutional investors. However, if you just look at a retail investor (or some institutional investor representing mostly retail investors), they're almost never on the side with a short-term informational advantage. On the one hand, it's 99% just institutions winning and institutions losing. But, when you zoom in on those 1% of cases where an unwitting retail investor got lucky or got unlucky, there's a bias in their luck due to their lack of valuable short-term information. On the other hand, those 2 ms might also mean that if a big retirement fund is unloading $10 million in stock to a bank, that bank has an extra 2 ms to simultaneously start selling the stock and get short in the options market before the low-latency market makers adjust prices. Maybe this means the bank is willing to bid $2 higher for the retirement fund's block trade. In any case, the actions of the HFTs have both positive and negative knock-on effects for ordinary retail investors, even if other HFTs account for the vast majority of the HFTs' profit margins. Sometimes the short-term information comes from the outside world, and sometimes it comes from institutional investors trying not to telegraph their moves on behalf of retail investors.

coldtea 8y ago

Bids should be made only through a turn-based system, with ample time to delete any advantage (or harm) from "data transmission" delays (1 minute for example).

Jedi72 8y ago
This makes a lot of sense to me. What actual economic value is being captured by HFT?
- auntienomen 8y ago
  They are paid to take on risk. Same deal as insurance, really.
  - mrchicity 8y ago
    Insurance is an apt analogy. Intuitively, if someone consistently makes money, they're just skimming without providing any value. People were astonished that Virtu made money almost every day, but wouldn't care if GEICO made money almost every day. In statistical expectation, you are better off not selling your stock to an HFT market maker. They are only buying from you, on average, when the spread you pay is more than they expect the stock to move. You could wait and sell to someone else for a tiny bit more, on average. In statistical expectation, you are better off not insuring your car. The insurance company writes the policy such that their expected payout over its lifetime is less than the premiums they collect. But real people don't live in the world of maximizing expected value. The guy selling his stocks is doing it a couple times a year, and doesn't want to risk losing a few % if the market gaps down, just to make a tenth of a penny more in expectation. Nobody wants to take out another car loan if their shiny new SUV gets hit driving out of the dealership. Bearing risks people don't want is valuable. So bizarrely, while these services may satisfy a need, consumers are only really happy when the provider loses. Nobody looks back on decades of crash-free driving reminiscing about paying those insurance premiums. Nobody likes to sell stock and see it tick up. (And I'm hand waving assuming you're a randomly selected trader or driver. If you have inside information, trading with anyone is positive EV. If you drive drunk at 100mph but have no tickets or DUIs on your record, insuring your car is positive EV. I'm also hand waving away comparative advantage. That better price an HFT market maker gets when turning over your trade may not be achievable for you. Maybe they can trade on more exchanges or predict prices better to get out at the right time. They do this all day so trading optimally is not a waste of their time, but it's probably a waste of yours. In that case, you may lose more and take more risk doing it yourself. I think that's closer to reality.)

Applejinx 8y ago

Is 'earn' a valid word here? Asking people who are NOT direct benificiaries of this behavior.

hueving 8y ago
Yes, they are taking on risks by making these trades. Do insurance companies 'earn' money? Do bail bondsmen 'earn' money? Does a retirement account 'earn' money?
- mikekchar 8y ago
  The definition that google returns for the word "earn" is: 1. obtain (money) in return for labour or services. 2. gain deservedly in return for one's behaviour or achievements. I think it's interesting to see the contrast in those 2 definitions. In the first place you concern yourself with whether or not a service has been performed. In the second place you concern yourself whether or not the money is deserved by way of the action/accomplishment. I think this neatly separates the two kinds of thinking on this sort of topic. On the one hand, people are appalled that people are making a lot of money without providing any particularly useful service (in the case of HFT, I suppose we could argue that it increases liquidity, which is helpful in some ways, but the market had ways of dealing with that before HFT so I think it's not a super strong argument). On the other hand, there are people who admire the cleverness, skill, impetus and daring of people who can find ways to make money without providing some kind of traditional service. To those people, the money has been earned by virtue of their ingenuity/initiative/luck. I think the conflict here is that to many people, the world would be a better place if we valued #1 considerably more than we value #2 (possibly to the point of not valuing #2 at all). It is, of course, not the world we currently live in, but I can understand the sentiment.
  - hueving 8y ago
    Hft does provide a service: taking on financial risk. This is a hard concept for people not in finance to understand, but think of it like insurance if that helps you.

lainga 8y ago

I thought I saw a bunch of guys on a rooftop in Jersey City with silver iodide rockets.

reaperducer 8y ago
Those mylar Happy Birthday balloons are ideal for wreaking havoc on telecom networks. Tie one with a long string to the fence around a remote earthstation or microwave horn, and let the breeze cause random outages. Hold on, someone's banging on my door... NO CARRIER