18 ms·

Timekeeping in Financial Exchanges

183 points by lucaspauker 6y ago

ipnon 6y ago
Surely the SEC is at the cutting edge of big data analysis given the requirements of their mission.
supernova87a 6y ago
I have a different question about timing on stock exchanges. What social good is being served by the ability to trade at microsecond frequency? Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? If this is a problem, I had this notion that stock markets (or the clearinghouses or whoever responsible) should slow down the allowed frequency to aggregate all trades within, say, 1 second, and do the clearing/price setting at that frequency. Surely being able to trade at the speed of 1 second is not a big loss of utility -- for the "legitimate" trading going on. Can't we stop this timing arms race? Or is the problem I'm thinking of not actually a concern? Are millions of us paying half a cent to these HFT trading firms' profits with every trade, just like the old notion of shaving a half a cent interest off of everyone's bank accounts to make some clever criminal rich?
- summitsummit 6y ago
  i don't think the point of those mechanisms are to serve social good. i would regard that as a fundamentally incorrect position to hold. the point is to make those that are advantaged by such tools to gain evergrowing more power over others. isn't that the whole history of human civilization? when's it ever been about serving a social good.
  - deleted 6y ago
    [deleted]
  - ISL 6y ago
    I have grain, Heather has cows, Sam has wood, Frank is elderly, Susan is a master carpenter, and Christian's kids need a larger house. Finance is the glue that allows us to barter in parallel with the world and across time. It does enormous social good. The alternative is going to the supermarket with some JavaScript to buy broccoli.
    - et2o 6y ago
      You should read Debt: The First 2000 years. This is a common but wrong idea. Barter economies have almost never existed.
- Laakeri 6y ago
  Trading in microseconds frequency provides liquidity to those who trade in milliseconds frequency. Trading in milliseconds frequency provides liquidity to those trading in seconds frequency and so on...
  - pbhjpbhj 6y ago
    Isn't the point to provide liquidity (availability of capital) to the market, ie producers of value, not to traders. Who needs $1M for their business but can't wait a microsecond to get it? Once you have the funds you probably have to wait 3 days for the bank to grant access.
- RyanHamilton 6y ago
  The ICE has a speed bump, if incentives align it may become popular: https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-cftc-nod-for-speed-bump-on-u-s-futures-exchange-idUKL2N22R1E0 https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-c...
- creeble 6y ago
  The argument for HFC is always "more liquidity is for the greater good." I think the best way to stop the timing arms race is through tax structures that encourage longer-term investing, and penalize extreme short-term investing. But you're up against people making lots of money in the arms race.
  - harryh 6y ago
    The amount of money being made in the arms race has gone down hugely over time due to computerization. Spreads are 1/10th of what they used to be (or smaller in many cases). There's really no need to fight this fight with taxes. The war has already been won.
- Etheryte 6y ago
  Only processing transactions once a second doesn't make the race for time go away. Taking the same example brought up in the article, Chicago and New York stock exchange, the two exchanges will never be perfectly in sync. Whosoever has the means to see a trade was made on one and then race to place a corresponding profitable order on the other before the clock ticks on that exchange, will make a profit over the others. The same will hold true no matter what granularity you make the exchange, until we reach physical limits to data transfer, which are already pretty close if you consider the orders of magnitude.
  - jasonwatkinspdx 6y ago
    Right, the actual proposals to do this are obviously more sophisticated than that. The way that the bigger/better hedge funds and such avoid someone else doing latency arb on them is by having their own points of presence near global trading hubs. Their traders and algo systems decide on the trades to make, communicate them all to the POPs where they're held behind a release gate, then the POPs do a global drop of the gate based on gps/atomic time synchronization. It becomes impossible for any external system to get a latency arb advantage. An arbitrary number of exchanges could implement the same sort of ingress/egress system.
- sippingjippers 6y ago
  It's an ongoing debate, but there are some facts that don't change regardless of stance in the debate. If you limit HFT, then markets /do/ become less efficient. When two trading venues for the same instrument exists, say, in Europe and the US, there is no benefit to any participant for a price disparity to exist for a long period. If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? Similarly for a seller in Europe, what if you were fleeced 10% because your holdings moved favourably in the moments before you sold? HFT also makes trading cheaper for everyone. Much of the time these firms are primarily competing with each other. One way that competition manifests is in the bid/ask spread. With firms fighting for order flow, if they can improve their offer by a single cent to ensure price-time order book priority then they'll improve their price. For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. There are more aspects I'm not smart enough to discuss, like how HFT basically enables entire asset classes through dynamic hedging. The only reason that option markets exist on most stocks is because there is an HFT counterparty that sold you the option rapidly buying and selling the underlying stock to ensure its exposure to the position was only the premium you paid for the option. HFTs also provide some market stability, first through increasing liquidity having a volatility smoothing effect, and second through so-called "volatility compression" as a result of option market dynamic hedging causing HFTs to buy when others are selling and sell when others are buying. This one has a darker side as depending on their aggregate positioning, HFTs will eventually begin to dump just like everyone else. I believe HFTs are also necessary for exchange-traded funds to be priced correctly and function correctly. That's essentially because two markets always exist for an ETF: a primary market between dealers and the fund where creation/redemption units are traded, and the secondary market where regular folk buy its shares. Given the prevalence of ETFs as a retail investing vehicle, if they were mispriced this would be potentially disastrous for individual investors. Probably a bunch more good reasons for HFT, I'm not sufficiently versed in this stuff
  - Scoundreller 6y ago
    > If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? > For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. As a Canadian, I take advantage of this to do USD-CAD currency exchange. Most big Canadian companies trade in Toronto and New York, so I can buy in Toronto in CAD$ and sell in New York for US$ because some HFTs are keeping them exactly in sync. All I pay is two trading commissions and a 1-2cents / $100share in spread. So converting $30k would cost me $20 in commissions and ~$12 in spread, so about 0.1% in cost and that goes down for as much as I'm comfortable in doing per trade. I probably lose a bit more in whatever distortion I've created, but $30k doesn't account for much in their hundreds of millions of $ in daily volume.
- bobcostas55 6y ago
  There's still an advantage to low latency with batching, as the later you go the more info you have.
  - supernova87a 6y ago
    But the idea would be that no one except the central coordinating marketmaker (?) would see all the bids and asks until the time of final execution at the end of the 1 second.
- cinntaile 6y ago
  There's actually a stock market, IEX, that has a long physical wire to introduce a physical signal delay to counteract this. Here's an interesting podcast regarding this exchange. http://investorfieldguide.com/katsuyama/ http://investorfieldguide.com/katsuyama/
  - n3k5 6y ago
    Tom Scott made a short video about these cables: https://youtu.be/d8BcCLLX4N4 https://youtu.be/d8BcCLLX4N4 61 kilometres of fibre-optics for a 350 microsecond delay.
  - harryh 6y ago
    It's important to understand the original business model of IEX (and IEX's hedge fund backers) and why they put in the speedbump. When large well informed funds want to trade large blocks of shares the price tends to quickly move against them so they make their trade at a slightly worse price. These funds would all like it if the market moved slower so that they got better prices so they made an exchange that moved slower. The trick is that other people don't want to trade on exchanges with less up to date prices. So IEX made up a bunch of false stories about how HFTs were bad for retail investors. They even tricked Michael Lewis into writing a book/advertisement for them. They also produced a slick video wrapping themselves in the flag/americana to try to trick people. You can watch it here: https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
  - supernova87a 6y ago
    Why do we need a long physical delay when the idea of batching / allowing only a certain frequency of trading does the same thing?
    - myrandomcomment 6y ago
      So I think we have mixed questions here. Let me address the one I know. Each of the major exchanges has a DC in which they will rent space to a 3rd party that will want to trade on the exchange. That market data feed and order execution use BGP & multicast (market data info is in multicast). Order execution can sometimes be a different link outbound. Please note I am generalizing details here sticking to mostly common items. So let’s say you are in the DC and your cage is right next to the Exchanges router so you cross connect is only 10m. So that is 50ns of latency in the path (assuming 10G SR on MM fiber). Your next competitor down from you is 20m away. So they are 100ns of latency. If you are an HFT, well. These people pay to dig through mountains to have the shorter path. What happened was this became a major issue oh, 20 years ago maybe? So what the exchange does is run the exact same length of cable to every drop off. So if you are 10m away and the longest run in the DC is 100m away then every cable run is 100m.
- harryh 6y ago
  There are several problems with trading at 1 second intervals (or any other fixed interval): A) What do you do when bids and asks do not match up? Who's orders get filled and who's do not? There are several possible answers to this problem, but not are satisfactory. B) You do not eliminate the advantage of speed because everyone is still incentivized to put in their orders at the last possible moment before the end of the interval. The world is continuous, not discrete. Therefore, like it or not, trading must be continuous and not discrete.
  - heavenlyblue 6y ago
    B) you don’t advertise orders until the end of the second; for all ordering questions within your algorithm, you assume they have arrived at a certain random order; given two of the above, you resolve all of the orders at that end of the second too
    - harryh 6y ago
      It doesn't matter if you don't advertise orders until the end of the second. There is a whole world of information out there outside if your particular exchange. People trade on that information, so they will wait until the last possible moment before the end of the interval to gather as much of that information as possible.
      - supernova87a 6y ago
        There is human-relevant information being traded and relevant on a microsecond timescale?
        harryh 6y ago
        Sure. Something important happens. Whoever reacts the fastest has an edge. I don't really know whether we're measuring "reacts the fastest" in terms of microseconds yet these days, but fastest is fastest no matter how much you win by. https://www.youtube.com/watch?v=cGZa-yf8vMU https://www.youtube.com/watch?v=cGZa-yf8vMU
- nickjj 6y ago
  > Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? And a follow up question: Wouldn't the results of this be unpredictable because the price could either be lower or higher than when the individual non-HFTer pulled the trigger to execute the trade?
- akra 6y ago
  For me its all about diminishing returns IMO. The benefits of minimizing latency from a day to hours to minutes does exist but the benefit gets smaller as the window reduces (and costs more to achieve). It also depends on what you believe the purpose of the market is - to scalp and trade, or to own a piece of an asset. If your in the latter category then anything tbh lower than a second provides little social utility. I have worked for these firms in the past and while they believe they do make the market "efficient" it's really the profit motive/bonuses that drives their behavior. What they are really after is "edge" to make more profit at the end of the day IMO, and one source of edge is information asymmetry which being faster than competitors gives you.
- jasonwatkinspdx 6y ago
  I talked about this at length with a retired quant back when the news about HFT shops first went around. The basic view is that HFT increases liquidity, which in the abstract should help everyone. My friend's view was, first, that privileged access, special order types, etc, were so egregiously wrong it need not be discussed further. Second they found the liquidity argument weak, and in general believed that signals on such short timescales were often more harmful than beneficial. They preferred a solution similar to yours, quantizing the markets by time and having one formally specified "fair playout" algorithm within the quanta. Pick the quanta such that it makes global communication time irrelevant (ie a few seconds). There's some subtleties to it but they considered the idea both workable and superior to what we have now. I have to be somewhat circumspect for privacy, but this person was quite successful at stat arb, and in a previous life very successful at finding zero days in kernel code. I generally believe they know what they're talking about in great depth on the topic. They're exactly who'd be near the top of your list of prospects if you wanted to set up a HFT shop.
  - dcl 6y ago
    So according to this person, this event never happened and absolutely does not continue to happen? https://www.reuters.com/article/sec-bats-settlement-idUSL1N0UR1KN20150112 https://www.reuters.com/article/sec-bats-settlement-idUSL1N0...
    - jasonwatkinspdx 6y ago
      "My friend's view was, first, that privileged access, ... were so egregiously wrong it need not be discussed further." Can you dial down the snark and explain what argument you're making that doesn't fall under the above?
      - dcl 6y ago
        My apologies. To me, it seemed that labelling the ideas of privileged access and secret order types to be so egregiously wrong and not worthy of discussion a bit dismissive when there has been evidence that these sort of activies have occured before.
- jlkasdfjkl 6y ago
  There is no particular social benefit to such speed per se, but it does not hurt investors. The speed race is HFT market makers competing with each other to be the first to offer shares at a new price level. When one firm gets faster than others, it hurts other HFTs (because the fast firm can now get bigger market share) but not investors. HFTs do on average make a small profit on each trade: they are in the business of charging investors for liquidity. But the fierce competition between HFTs means that their margins get competed down and they cannot charge very much for liquidity. Their average profit per trade is tiny. The Taiwan stock exchange used to match orders every few seconds, like you suggest, instead of continuously. They switched to continuous trading earlier this year, and they say a little bit about why here: [0]. I might be wrong, but I think there is no rule preventing anyone from setting up a Taiwan-style batch-auction exchange in the US. Note that there are already over a dozen US stock exchanges, each with slightly different rules and order types, each competing for market share. If there's investor demand for a batch-auction exchange in the US, someone could create one and make a bunch of money running it. [0] https://www.twse.com.tw/en/page/products/trading/information13.html https://www.twse.com.tw/en/page/products/trading/information...
- dllthomas 6y ago
  If we quantize to one second, then either: 1) it still matters when in that second my order came in, and there's still a race, or 2) it doesn't matter when in that second my order came in, and there's an incentive to delay my order in case we learn something in that second. In either case, the details will differ quite a bit, but having the fastest connection and best tech is still an advantage.
- a2h 6y ago
  Yes, except half a cent per share not per trade.
- pdovy 6y ago
  HFT market maker here (my views are my own), there are some consequences that immediately fall out from periodic batch auctions like this. 1. There will still be a race to update your entry in the auction as close as possible to when it runs, because equity markets do not operate in a vacuum. Correlated futures markets don't operate this way (and the regulatory lift to make them do so is separate, and just as hard as doing this for equities), so there is still a race to incorporate the most up to date information ahead of a periodic auction. 2. This _will_ widen the bid-ask spread and reduce liquidity, for the following reasons. There are right now 16 distinct exchanges, excluding dark pools. As a market maker, I want to show my quote to buy/sell to as many participants as possible, and so I quote across a decent subset of these exchanges at any given time. I _don't_ want to get simultaneously filled on all these orders, and am relying on the fact that most of the time if I get filled once, I can cancel from all the other exchanges and then re-evaluate what I think the fair value of the stock is, and put out new orders reflecting that view. The more confidence I have that I can do this, the tighter a spread I can offer, and on the flip side the more risk of overfill there is, the wider I need to quote to account for that risk. In a simultaneous periodic batch auction world anyone can take all available liquidity market-wide trivially, so I have to either reduce liquidity across the market to a lower level to cap my risk, or substantially widen my quote to make that risk economically viable. Both are ultimately bad for counterparties. 3. This would likely serve to entrench existing wholesalers unless they were forced to stop crossing orders internally, or otherwise play by a stricter set of rules (and good luck with that). The vast, vast majority of retail activity never sees a public marketplace, but is executed by a wholesaler - so if you're leaving them out of this picture you're not really changing much. My personal $0.02 on this is that the latency race is just a turf war between liquidity providers, but has no real impact outside of that arena. There are other areas of needed reform: market fragmentation to the degree it exists today is a net negative IMO. Similarly the market-wide best execution requirement is just extra complexity and creates opportunities for regulatory arbitrage. The proliferation of exotic order types and "differentiating" exchange behavior adds complexity and creates opportunities to game the system. Exchanges charge exorbitant fees for access that create barriers to entry for smaller participants. To name a few.
- b20000 6y ago
  what social good is served by facebook? I suggest their servers are slowed down by 1 second so everyone spends less time on facebook.
nullc 6y ago
What the heck does NIST-F1-- an intermittently operating research oscillator-- have to do with stock exchanges?
- HenryKissinger 6y ago
  > Lastly, timestamps for automated orders were required to be within 50 milliseconds of NIST and timestamps for manual orders were required to be within 1 second of NIST.
  - nullc 6y ago
    ::nods:: but that doesn't really have much to do with F1.
- lucaspauker 6y ago
  NIST-F1 is not intermittently operating: https://www.nist.gov/pml/time-and-frequency-division/time-realization/primary-standard-nist-f1 https://www.nist.gov/pml/time-and-frequency-division/time-re...
  - nullc 6y ago
    > NIST-F1 is not intermittently operating See links: > A maser ensemble time scale is just sufficiently stable and accurate to take advantage of the performance of intermittently operating primary frequency standards such as NIST-F1 and F2. https://www.nist.gov/system/files/documents/2017/05/09/Time-Frequency-Report.pdf https://www.nist.gov/system/files/documents/2017/05/09/Time-... > Neither NIST-F1 nor NIST-F2 is operated as a clock and both are run only intermittently. https://www.bipm.info/utils/en/pdf/time_ann_rep/Time_annual_report_2014/17_PSFS2014-NIST_TAR14.pdf https://www.bipm.info/utils/en/pdf/time_ann_rep/Time_annual_... Devices like F1 are used to correct hydrogen masers which are extremely stable but have systemic errors in frequency. Unlike the masers, they don't run all the time, or (or last I saw-- anywhere close to most of the time, though I'm not quickly finding a link with operating stats).
    - 6y ago
teej 6y ago
> “As of 2013, NIST-F1 has an uncertainty of ..., which means that it would take 100 years for the clock to be off by a second” This didn’t sound right to me. The clock being off 100ms every 10 years sounds terrible. This must be a typo because the source says: “... which means it would neither gain nor lose a second in more than 100 million years!”
- PaulDavisThe1st 6y ago
  "1999 — NIST-F1 begins operation with an uncertainty of 1.7 parts in 10 to the 15th power, or accuracy to about one second in 20 million years, making it the most accurate clock ever made (a distinction shared with a similar standard in Paris)." https://www.nist.gov/news-events/news/1999/12/nist-f1-cesium-fountain-clock https://www.nist.gov/news-events/news/1999/12/nist-f1-cesium...
- lucaspauker 6y ago
  Good catch. It should read 100 million years, not 100 years. Website is updated now.
- hacker_newz 6y ago
  I was surprised by all the inaccuracy in this blog post until I realized it was written by an algo intern.
HenryKissinger 6y ago
The insurance company I used to work at had legit scientists - people with masters and phds in fields like hydrology - to help develop loss models for property & casualty incidents. I'm half joking when I say that the first company to come up with a technology to travel faster than light will be a bank or a hedge fund or a high frequency trading firm. Hire the top theoretical physicists in the world for 7 figure salaries, certainly more than they could ever make in academia or research labs - and throw them at the problem. If a company is willing to spend $300m for a 3ms advantage, imagine how much one would be willing to spend for literally instantaneous transactions.
- dpratt 6y ago
  Considering that your hypothetical solution would violate causality, there’d be quite a bit more than a $300 million gain from it.
  - JackFr 6y ago
    http://www.princeton.edu/~pkrugman/interstellar.pdf http://www.princeton.edu/~pkrugman/interstellar.pdf Krugman has addressed arbitrage between inertial frames.
- lucaspauker 6y ago
  You're right however this isn't possible with our current understanding of time: https://en.wikipedia.org/wiki/Spacetime https://en.wikipedia.org/wiki/Spacetime
jeffbee 6y ago
This article from today is somewhat obsolete. MiFID II regulations require absolute accuracy of either 100 microseconds or 1 millisecond depending on certain conditions, and reporting in microseconds. I don't know why they went with microseconds when nanoseconds would have been technically just as practical and far more future-proof. https://ec.europa.eu/finance/securities/docs/isd/mifid/rts/160607-rts-25-annex_en.pdf https://ec.europa.eu/finance/securities/docs/isd/mifid/rts/1...
- lucaspauker 6y ago
  Europe regulations are different than US regulations and are more stringent, as pointed out in the article you linked. I focused on US rules for the article on my site.
- RyanHamilton 6y ago
  >>technically just as practical What makes you think that? My experience has been that getting closer to perfection requires increasingly more effort as you approach it. In this case, having a larger limit would allow monitoring and correction in case of an error without any kind of "trip" being triggered.
  - lucaspauker 6y ago
    You're right. The more fine-tuned it becomes, the more you have to consider low-level protocols. This paper https://nvlpubs.nist.gov/nistpubs/jres/121/jres.121.023.pdf https://nvlpubs.nist.gov/nistpubs/jres/121/jres.121.023.pdf suggests with current systems, time uncertainty can be decreased to about 1-10 us from NIST.
  - jeffbee 6y ago
    It doesn't really matter if the last three digits are just noise for the time being. It's just as practical, from the programmer's standpoint. 64 bits worth of nanoseconds gives abundant range (±292 years from the origin) and microsecond times already necessitate a 64-bit representation (2^31 microseconds only gets you half an hour). So you can build all your protocols around signed 64-bit nanos from a defined origin and never need to change it again.
vhiremath4 6y ago
> In order to do it, they bored through mountains in Pennsylvania in order to make the path of the wire as straight as possible, reducing the distance information had to travel. In total, the project cost \$300 million. The result? They can send information in 13.3 milliseconds round trip, 3 milliseconds faster than the competition at the time. So we can see that a 3 millisecond edge is worth at least \$300 million. I understand the motivation and rationale and that my take here is subjective, but I take a pause at how sad it is that we're literally boring holes through our natural mountains in order to flip bits 3ms faster in the name of high frequency trading.
- deleted 6y ago
  [deleted]
- 1123581321 6y ago
  Try not to think about the infrastructure dug and bored so we can make comments here. :)
- iancmceachern 6y ago
  Exactly. Because it doesn't generate real value. Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I understand the real pragmatic benefits and return on investment from these. A farm field is irrigated, a home not destroyed, less fuel used in trucking, on and on. These investments generate real value because they increase the total of societal output, not just that particular factions slice of the pie. Meaning, you are finding new gold to mine, not just taking over part of your neighbors gold mine and saying you are adding value. Its not adding value to the overall economy. Please help me, what real value does an investment like this yield for the economy as a whole? As i understand it an investment like taking part of your neighbors gold mine, not mining new ground. Effectively they have increased their slice of the pie, in this case it is time not land, but not made the overall pie bigger. It is interesting to think about things this way, in terms of investments that increase the carrying capacity of our economy, and those that don't. Advertising comes to mind. The cola wars, while expensive, dont yield a net increase in cola drinking, just a relative difference between the brands. Same with beer, on and on.
dmurray 6y ago
Tl;dr: "If exchange clocks are imprecise--say they are only accurate to one second--and a HFT can execute many orders in a second, then the exchange could reorder all the trades in the second in any way they want, without being detected by an auditor!" This is the only sentence in the article relevant to the title. Auditors need to insist on good timekeeping to prevent exchanges from committing fraud. HFT firms don't fundamentally care about having accurate clocks. They care about reacting first. Having good clocks is useful for second order reasons like debugging and regulatory compliance.
- andylynch 6y ago
  Clock sync is mostly for correlating events between distributed systems (like those feeding CAT). In the exchanges themselves, the ordering of events is better defined and often just done with sequence numbers on each matching engine or order book as messages arrive and events occur.
  - dmurray 6y ago
    Exactly, the exchange can work just fine processing each message in order without worrying about absolute time. Absolute time is needed for reporting or auditing purposes.
lpage 6y ago
Most of this information is somewhere between incomplete and wrong. Accurate timekeeping (on exchange and otherwise) is crucial to latency-sensitive players in finance. I'll get to that after addressing the article. > For example, if I trade one microsecond faster than a competitor, the exchange needs to ensure that my order gets processed first. If the trading venue operates a price-time priority mechanism, the exchange should strive to ensure that orders receive the correct time-based priority, but there are no guarantees. Furthermore, priority and processing are separate considerations. The distinction between priority and processing is vital, given that order entry and market data distribution - both inter-exchange and intra-exchange - are challenging problems that aren't solved by accurate clocks alone. Much of the complexity of HFT at the systems level is there to deal with said complexity. Even for a single sender, messages (new orders, cancelation requests, etc.) can (and on some exchanges, often are) processed out-of-order. You, as a market participant, might place an order, send a cancel shortly after that, have the cancel rejected for referencing an order that does not exist, and receive an acknowledgment of your new order immediately thereafter [1]. That might or might not say anything about how good the exchange is at establishing match priority. But idealizing exchanges as systems that ensure fairness via a total ordering of events (by time or any other mechanism) glosses over the reality. Those details aside, what does "trade one microsecond faster than a competitor" mean? Network egress from the sender? Network ingress at the exchange? Exchanges are a distributed system comprised of order entry gateways and matching engines, so what determines ordering? If gateways are the arbitrators of order, do they use wall time or a shared frequency standard? If matching engines are, how are orders arriving from discrepant order entry gateways serialized? Those are systems problems, not clock problems. > HFT can execute many orders in a second, then the exchange could reorder all the trades in the second in any way they want, without being detected by an auditor! This isn't the threat model. What follows is also an oversimplification, but categorically, front running can occur in two forms. One involves the executing broker placing orders for their own account in front of a large client order and profiting from the market impact caused when executing on behalf of the client. Given that large orders executed incrementally, the timescales in question are minutes/hours/days, and microsecond accuracy clocks don't play a significant part in the detection or prosecution thereof. Microstructure level front running is a concern, but the nuances are s.t. accurate timestamps won't do much to detect abuse (they are important as evidence in an enforcement action). > How are Clocks Synced? Pretty much this whole section is wrong. In a way, it conflates how NTP (not IEEE 1588v2), one-way satellite time and frequency transfer, and GPS timekeeping work. Exchanges mostly use IEEE 1588v2 with GNSS synchronized grandmasters; they're not actively disciplining the grandmasters against each other, as this article suggests. Furthermore, accurate disciplining of the grandmaster is heavily dependent on a pulse-per-second (PPS) standard provided by the GNSS; the GNSS constellation almanac and time codes alone won't get you there. Outperforming a GNSS solution by synching grandmasters using something more exotic such as Two-way satellite time and frequency transfer (TWSTFT) is possible, but not done by exchanges (the economic incentives aren't there). Why do latency sensitive market participants care about timestamps? Backtesting. Quantifying uncertainty in one's system and connected systems is crucial, as is reconstructing a cross-venue series of events under a probabilistic framework. To the extent that an exchange has a regulatory obligation or pressure from market participants (who again, want accurate timestamps for backtesting purposes), they'll invest in accurate timekeeping infrastructure. Such infrastructure is way more commoditized now than it was 20 years ago. However, timekeeping is still a tricky problem, and disciplining a grandmaster is far from the most challenging part. [1] This is super annoying, and exchanges on the whole have gotten better about either engineering systems that don't do it at all, or do it infrequently even at HFT line rates. [2] https://tf.nist.gov/time/twoway.htm https://tf.nist.gov/time/twoway.htm
erikerikson 6y ago
Clocks are dominated by causality and ordering. This is why physics doesn't recognize "time".
gizmodo59 6y ago
The book flash boys is an interesting read on this topic. https://en.wikipedia.org/wiki/Flash_Boys https://en.wikipedia.org/wiki/Flash_Boys
- __d 6y ago
  Interesting, perhaps. But don't take it as an accurate, independent, researched recounting of facts, because it's a long way from that.
Nition 6y ago
I work in videogames and I don't know much about stock trading, but in games we often deal with networking problems like who shot first. It sounds like the central stock exchange is handling trades in a naive way like this: T = 0: Client A sends a trade from 200ms away T = 0.1s: Client B sends a trade from 50ms away T = 0.2s: Client C sends a trade from 100ms away T = 0.15s: Client B's trade arrives, process it T = 0.2s: Client A's trade arrives, process it T = 0.3s: Client C's trade arrives, process it What we usually do on a server (lag compensation by rolling back the enemy player's hitbox) won't work here, but I wonder if a version of what's usually called client-side prediction would work. In this case it would be server-side instead: At T=0.15s, Client B's trade arrives. It's timestamped as T = 0.1. We look at all trades since T = 0.1. There aren't any so we just process it. At T = 0.2s, Client A's trade arrives. It's timestamped as T = 0. We look at all trades since T = 0. Client B's trade was timestamped T = 0.1. *Roll back and resimulate all trades since T = 0.* Trade order is now A, B. At T = 0.3s, Client C's trade arrives. It's timestamped as T = 0.2. No trades since 0.2 so we process it normally. Trade order is now A, B, C. Most likely too complex and not actually feasible, just thought I'd mention it. The clocks on the remote clients would need to be synchronised with the central atomic clock so that their timestamps align correctly which might be tricky/impossible due to the extreme accuracy required. You also have to trust the client to not just fake their timestamp down a few ms.
- lucaspauker 6y ago
  Most (high frequency) firms pay for server space next to the matching engine. Wire length is standardized so you don't have these problems.
- andylynch 6y ago
  No- it would not work. exchanges and brokerages care about order of arrival rather than transmission, and for good reason. Anything else would be more complicated and much more open to gaming (the resimulation bit you propose would involve effectively cancelling the last transactions, probably quite frequently, and a huge incentive for at least B and probably C to have ‘inaccurate’ timestamps to get the trade they way at someone else’s expense)
alexchamberlain 6y ago
This may be a stupid question: the article explains why ordering of trades is important then explains that that means the clocks need to be accurate wrt a 3rd party clock; why? Doesn't it just matter that the order the trades were received in is recorded (and respected)? (Although I work in Fintech, I have nothing to do with the exchange trading side of things.)
- andylynch 6y ago
  The reasons mentioned in regulation are twofold- that it allows better reconstruction of activity across markets when monitoring for market abuse, and that it allows for a meaningful consolidated tape
GuB-42 6y ago
Related story. https://www.motherjones.com/kevin-drum/2013/09/somebody-stole-7-milliseconds-federal-reserve/ https://www.motherjones.com/kevin-drum/2013/09/somebody-stol... The story is: an announcement was made at precisely 2pm in Washington, and related transactions were made 2-3 milliseconds after that in Chicago, faster than the speed of light... Yep, finance defies special relativity. For some reason, insider trading is seen as a more plausible explanation than faster than light communication... But still, that level of precision is ridiculous.
- pandaman 6y ago
  Given that the distance between Washington and Chicago is ~950km and the speed of light is ~300,000 km/s I have a huge issue with trusting anything in the article which starts with " It takes seven milliseconds for this information to get to Chicago. ". It appears that 3ms for that trip is quite plausible, while 2ms is not. Given the opening misinformation and the whole "2-3ms" phrasing (why not exact timing of the earliest order, could 3.5ms be "2-3ms"? could 3.9ms?) the most plausible assumption that it's one of the early specimen of so-called "fake news".
  - coolgeek 6y ago
    Even if the information got to Chicago in 3ms, you would still need time to process the information and generate a response. So trading on the information, from Chicago, 2-3ms after its release in DC seems implausible, if not impossible
    - pandaman 6y ago
      Sure, but how much time is needed to process that information? As far as I understand in this case it was a single bit (change rate yes/no). What is the minimum time you think is plausible for 1bit throughput?
jennyyang 6y ago
Why on earth would they pay $300M to have a fiber cable to Chicago? It sounds like they could move all their employees from Chicago to NYC for cheaper!
- jlgaddis 6y ago
  cf. arbitrage [0] -- [0]: https://en.wikipedia.org/wiki/Arbitrage https://en.wikipedia.org/wiki/Arbitrage
MR4D 6y ago
HFT is not the problem - the pricing is. Hear me out.... Today, you could have bought AMZN stock for $3442.93 at some point during the day. AMZN nominally has $0.01 price increments. To put that in perspective, 0.01 divided by the share price is 344,293 which means we can affect price in 1/344,293 of a share. That’s nuts, and actually removes liquidity. Instead, pricing change minimums should be a percentage of a share. I would think 1/10,000th of a share would be more than enough. Honestly, for most stocks, a nickel difference wouldn’t matter and the liquidity would be better. —- EDIT : meant to also add that change the time minimums to also be larger (say 1/10 of a second) would also help liquidity and remove the need for HFT. So, timing/pricing deltas can either increase or decrease the need for HFT.

183 points by lucaspauker 6y ago

Surely the SEC is at the cutting edge of big data analysis given the requirements of their mission.

I have a different question about timing on stock exchanges. What social good is being served by the ability to trade at microsecond frequency? Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? If this is a problem, I had this notion that stock markets (or the clearinghouses or whoever responsible) should slow down the allowed frequency to aggregate all trades within, say, 1 second, and do the clearing/price setting at that frequency. Surely being able to trade at the speed of 1 second is not a big loss of utility -- for the "legitimate" trading going on. Can't we stop this timing arms race? Or is the problem I'm thinking of not actually a concern? Are millions of us paying half a cent to these HFT trading firms' profits with every trade, just like the old notion of shaving a half a cent interest off of everyone's bank accounts to make some clever criminal rich?

summitsummit 6y ago
i don't think the point of those mechanisms are to serve social good. i would regard that as a fundamentally incorrect position to hold. the point is to make those that are advantaged by such tools to gain evergrowing more power over others. isn't that the whole history of human civilization? when's it ever been about serving a social good.
- deleted 6y ago
  [deleted]
- ISL 6y ago
  I have grain, Heather has cows, Sam has wood, Frank is elderly, Susan is a master carpenter, and Christian's kids need a larger house. Finance is the glue that allows us to barter in parallel with the world and across time. It does enormous social good. The alternative is going to the supermarket with some JavaScript to buy broccoli.
  - et2o 6y ago
    You should read Debt: The First 2000 years. This is a common but wrong idea. Barter economies have almost never existed.
Laakeri 6y ago
Trading in microseconds frequency provides liquidity to those who trade in milliseconds frequency. Trading in milliseconds frequency provides liquidity to those trading in seconds frequency and so on...
- pbhjpbhj 6y ago
  Isn't the point to provide liquidity (availability of capital) to the market, ie producers of value, not to traders. Who needs $1M for their business but can't wait a microsecond to get it? Once you have the funds you probably have to wait 3 days for the bank to grant access.
RyanHamilton 6y ago
The ICE has a speed bump, if incentives align it may become popular: https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-cftc-nod-for-speed-bump-on-u-s-futures-exchange-idUKL2N22R1E0 https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-c...
creeble 6y ago
The argument for HFC is always "more liquidity is for the greater good." I think the best way to stop the timing arms race is through tax structures that encourage longer-term investing, and penalize extreme short-term investing. But you're up against people making lots of money in the arms race.
- harryh 6y ago
  The amount of money being made in the arms race has gone down hugely over time due to computerization. Spreads are 1/10th of what they used to be (or smaller in many cases). There's really no need to fight this fight with taxes. The war has already been won.
Etheryte 6y ago
Only processing transactions once a second doesn't make the race for time go away. Taking the same example brought up in the article, Chicago and New York stock exchange, the two exchanges will never be perfectly in sync. Whosoever has the means to see a trade was made on one and then race to place a corresponding profitable order on the other before the clock ticks on that exchange, will make a profit over the others. The same will hold true no matter what granularity you make the exchange, until we reach physical limits to data transfer, which are already pretty close if you consider the orders of magnitude.
- jasonwatkinspdx 6y ago
  Right, the actual proposals to do this are obviously more sophisticated than that. The way that the bigger/better hedge funds and such avoid someone else doing latency arb on them is by having their own points of presence near global trading hubs. Their traders and algo systems decide on the trades to make, communicate them all to the POPs where they're held behind a release gate, then the POPs do a global drop of the gate based on gps/atomic time synchronization. It becomes impossible for any external system to get a latency arb advantage. An arbitrary number of exchanges could implement the same sort of ingress/egress system.
sippingjippers 6y ago
It's an ongoing debate, but there are some facts that don't change regardless of stance in the debate. If you limit HFT, then markets /do/ become less efficient. When two trading venues for the same instrument exists, say, in Europe and the US, there is no benefit to any participant for a price disparity to exist for a long period. If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? Similarly for a seller in Europe, what if you were fleeced 10% because your holdings moved favourably in the moments before you sold? HFT also makes trading cheaper for everyone. Much of the time these firms are primarily competing with each other. One way that competition manifests is in the bid/ask spread. With firms fighting for order flow, if they can improve their offer by a single cent to ensure price-time order book priority then they'll improve their price. For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. There are more aspects I'm not smart enough to discuss, like how HFT basically enables entire asset classes through dynamic hedging. The only reason that option markets exist on most stocks is because there is an HFT counterparty that sold you the option rapidly buying and selling the underlying stock to ensure its exposure to the position was only the premium you paid for the option. HFTs also provide some market stability, first through increasing liquidity having a volatility smoothing effect, and second through so-called "volatility compression" as a result of option market dynamic hedging causing HFTs to buy when others are selling and sell when others are buying. This one has a darker side as depending on their aggregate positioning, HFTs will eventually begin to dump just like everyone else. I believe HFTs are also necessary for exchange-traded funds to be priced correctly and function correctly. That's essentially because two markets always exist for an ETF: a primary market between dealers and the fund where creation/redemption units are traded, and the secondary market where regular folk buy its shares. Given the prevalence of ETFs as a retail investing vehicle, if they were mispriced this would be potentially disastrous for individual investors. Probably a bunch more good reasons for HFT, I'm not sufficiently versed in this stuff
- Scoundreller 6y ago
  > If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? > For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. As a Canadian, I take advantage of this to do USD-CAD currency exchange. Most big Canadian companies trade in Toronto and New York, so I can buy in Toronto in CAD$ and sell in New York for US$ because some HFTs are keeping them exactly in sync. All I pay is two trading commissions and a 1-2cents / $100share in spread. So converting $30k would cost me $20 in commissions and ~$12 in spread, so about 0.1% in cost and that goes down for as much as I'm comfortable in doing per trade. I probably lose a bit more in whatever distortion I've created, but $30k doesn't account for much in their hundreds of millions of $ in daily volume.
bobcostas55 6y ago
There's still an advantage to low latency with batching, as the later you go the more info you have.
- supernova87a 6y ago
  But the idea would be that no one except the central coordinating marketmaker (?) would see all the bids and asks until the time of final execution at the end of the 1 second.
cinntaile 6y ago
There's actually a stock market, IEX, that has a long physical wire to introduce a physical signal delay to counteract this. Here's an interesting podcast regarding this exchange. http://investorfieldguide.com/katsuyama/ http://investorfieldguide.com/katsuyama/
- n3k5 6y ago
  Tom Scott made a short video about these cables: https://youtu.be/d8BcCLLX4N4 https://youtu.be/d8BcCLLX4N4 61 kilometres of fibre-optics for a 350 microsecond delay.
- harryh 6y ago
  It's important to understand the original business model of IEX (and IEX's hedge fund backers) and why they put in the speedbump. When large well informed funds want to trade large blocks of shares the price tends to quickly move against them so they make their trade at a slightly worse price. These funds would all like it if the market moved slower so that they got better prices so they made an exchange that moved slower. The trick is that other people don't want to trade on exchanges with less up to date prices. So IEX made up a bunch of false stories about how HFTs were bad for retail investors. They even tricked Michael Lewis into writing a book/advertisement for them. They also produced a slick video wrapping themselves in the flag/americana to try to trick people. You can watch it here: https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
- supernova87a 6y ago
  Why do we need a long physical delay when the idea of batching / allowing only a certain frequency of trading does the same thing?
  - myrandomcomment 6y ago
    So I think we have mixed questions here. Let me address the one I know. Each of the major exchanges has a DC in which they will rent space to a 3rd party that will want to trade on the exchange. That market data feed and order execution use BGP & multicast (market data info is in multicast). Order execution can sometimes be a different link outbound. Please note I am generalizing details here sticking to mostly common items. So let’s say you are in the DC and your cage is right next to the Exchanges router so you cross connect is only 10m. So that is 50ns of latency in the path (assuming 10G SR on MM fiber). Your next competitor down from you is 20m away. So they are 100ns of latency. If you are an HFT, well. These people pay to dig through mountains to have the shorter path. What happened was this became a major issue oh, 20 years ago maybe? So what the exchange does is run the exact same length of cable to every drop off. So if you are 10m away and the longest run in the DC is 100m away then every cable run is 100m.
harryh 6y ago
There are several problems with trading at 1 second intervals (or any other fixed interval): A) What do you do when bids and asks do not match up? Who's orders get filled and who's do not? There are several possible answers to this problem, but not are satisfactory. B) You do not eliminate the advantage of speed because everyone is still incentivized to put in their orders at the last possible moment before the end of the interval. The world is continuous, not discrete. Therefore, like it or not, trading must be continuous and not discrete.
- heavenlyblue 6y ago
  B) you don’t advertise orders until the end of the second; for all ordering questions within your algorithm, you assume they have arrived at a certain random order; given two of the above, you resolve all of the orders at that end of the second too
  - harryh 6y ago
    It doesn't matter if you don't advertise orders until the end of the second. There is a whole world of information out there outside if your particular exchange. People trade on that information, so they will wait until the last possible moment before the end of the interval to gather as much of that information as possible.
    - supernova87a 6y ago
      There is human-relevant information being traded and relevant on a microsecond timescale?
      - harryh 6y ago
        Sure. Something important happens. Whoever reacts the fastest has an edge. I don't really know whether we're measuring "reacts the fastest" in terms of microseconds yet these days, but fastest is fastest no matter how much you win by. https://www.youtube.com/watch?v=cGZa-yf8vMU https://www.youtube.com/watch?v=cGZa-yf8vMU
nickjj 6y ago
> Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? And a follow up question: Wouldn't the results of this be unpredictable because the price could either be lower or higher than when the individual non-HFTer pulled the trigger to execute the trade?
akra 6y ago
For me its all about diminishing returns IMO. The benefits of minimizing latency from a day to hours to minutes does exist but the benefit gets smaller as the window reduces (and costs more to achieve). It also depends on what you believe the purpose of the market is - to scalp and trade, or to own a piece of an asset. If your in the latter category then anything tbh lower than a second provides little social utility. I have worked for these firms in the past and while they believe they do make the market "efficient" it's really the profit motive/bonuses that drives their behavior. What they are really after is "edge" to make more profit at the end of the day IMO, and one source of edge is information asymmetry which being faster than competitors gives you.
jasonwatkinspdx 6y ago
I talked about this at length with a retired quant back when the news about HFT shops first went around. The basic view is that HFT increases liquidity, which in the abstract should help everyone. My friend's view was, first, that privileged access, special order types, etc, were so egregiously wrong it need not be discussed further. Second they found the liquidity argument weak, and in general believed that signals on such short timescales were often more harmful than beneficial. They preferred a solution similar to yours, quantizing the markets by time and having one formally specified "fair playout" algorithm within the quanta. Pick the quanta such that it makes global communication time irrelevant (ie a few seconds). There's some subtleties to it but they considered the idea both workable and superior to what we have now. I have to be somewhat circumspect for privacy, but this person was quite successful at stat arb, and in a previous life very successful at finding zero days in kernel code. I generally believe they know what they're talking about in great depth on the topic. They're exactly who'd be near the top of your list of prospects if you wanted to set up a HFT shop.
- dcl 6y ago
  So according to this person, this event never happened and absolutely does not continue to happen? https://www.reuters.com/article/sec-bats-settlement-idUSL1N0UR1KN20150112 https://www.reuters.com/article/sec-bats-settlement-idUSL1N0...
  - jasonwatkinspdx 6y ago
    "My friend's view was, first, that privileged access, ... were so egregiously wrong it need not be discussed further." Can you dial down the snark and explain what argument you're making that doesn't fall under the above?
    - dcl 6y ago
      My apologies. To me, it seemed that labelling the ideas of privileged access and secret order types to be so egregiously wrong and not worthy of discussion a bit dismissive when there has been evidence that these sort of activies have occured before.
jlkasdfjkl 6y ago
There is no particular social benefit to such speed per se, but it does not hurt investors. The speed race is HFT market makers competing with each other to be the first to offer shares at a new price level. When one firm gets faster than others, it hurts other HFTs (because the fast firm can now get bigger market share) but not investors. HFTs do on average make a small profit on each trade: they are in the business of charging investors for liquidity. But the fierce competition between HFTs means that their margins get competed down and they cannot charge very much for liquidity. Their average profit per trade is tiny. The Taiwan stock exchange used to match orders every few seconds, like you suggest, instead of continuously. They switched to continuous trading earlier this year, and they say a little bit about why here: [0]. I might be wrong, but I think there is no rule preventing anyone from setting up a Taiwan-style batch-auction exchange in the US. Note that there are already over a dozen US stock exchanges, each with slightly different rules and order types, each competing for market share. If there's investor demand for a batch-auction exchange in the US, someone could create one and make a bunch of money running it. [0] https://www.twse.com.tw/en/page/products/trading/information13.html https://www.twse.com.tw/en/page/products/trading/information...
dllthomas 6y ago
If we quantize to one second, then either: 1) it still matters when in that second my order came in, and there's still a race, or 2) it doesn't matter when in that second my order came in, and there's an incentive to delay my order in case we learn something in that second. In either case, the details will differ quite a bit, but having the fastest connection and best tech is still an advantage.
a2h 6y ago
Yes, except half a cent per share not per trade.
pdovy 6y ago
HFT market maker here (my views are my own), there are some consequences that immediately fall out from periodic batch auctions like this. 1. There will still be a race to update your entry in the auction as close as possible to when it runs, because equity markets do not operate in a vacuum. Correlated futures markets don't operate this way (and the regulatory lift to make them do so is separate, and just as hard as doing this for equities), so there is still a race to incorporate the most up to date information ahead of a periodic auction. 2. This _will_ widen the bid-ask spread and reduce liquidity, for the following reasons. There are right now 16 distinct exchanges, excluding dark pools. As a market maker, I want to show my quote to buy/sell to as many participants as possible, and so I quote across a decent subset of these exchanges at any given time. I _don't_ want to get simultaneously filled on all these orders, and am relying on the fact that most of the time if I get filled once, I can cancel from all the other exchanges and then re-evaluate what I think the fair value of the stock is, and put out new orders reflecting that view. The more confidence I have that I can do this, the tighter a spread I can offer, and on the flip side the more risk of overfill there is, the wider I need to quote to account for that risk. In a simultaneous periodic batch auction world anyone can take all available liquidity market-wide trivially, so I have to either reduce liquidity across the market to a lower level to cap my risk, or substantially widen my quote to make that risk economically viable. Both are ultimately bad for counterparties. 3. This would likely serve to entrench existing wholesalers unless they were forced to stop crossing orders internally, or otherwise play by a stricter set of rules (and good luck with that). The vast, vast majority of retail activity never sees a public marketplace, but is executed by a wholesaler - so if you're leaving them out of this picture you're not really changing much. My personal $0.02 on this is that the latency race is just a turf war between liquidity providers, but has no real impact outside of that arena. There are other areas of needed reform: market fragmentation to the degree it exists today is a net negative IMO. Similarly the market-wide best execution requirement is just extra complexity and creates opportunities for regulatory arbitrage. The proliferation of exotic order types and "differentiating" exchange behavior adds complexity and creates opportunities to game the system. Exchanges charge exorbitant fees for access that create barriers to entry for smaller participants. To name a few.
b20000 6y ago
what social good is served by facebook? I suggest their servers are slowed down by 1 second so everyone spends less time on facebook.

nullc 6y ago

What the heck does NIST-F1-- an intermittently operating research oscillator-- have to do with stock exchanges?

HenryKissinger 6y ago
> Lastly, timestamps for automated orders were required to be within 50 milliseconds of NIST and timestamps for manual orders were required to be within 1 second of NIST.
- nullc 6y ago
  ::nods:: but that doesn't really have much to do with F1.
lucaspauker 6y ago
NIST-F1 is not intermittently operating: https://www.nist.gov/pml/time-and-frequency-division/time-realization/primary-standard-nist-f1 https://www.nist.gov/pml/time-and-frequency-division/time-re...
- nullc 6y ago
  > NIST-F1 is not intermittently operating See links: > A maser ensemble time scale is just sufficiently stable and accurate to take advantage of the performance of intermittently operating primary frequency standards such as NIST-F1 and F2. https://www.nist.gov/system/files/documents/2017/05/09/Time-Frequency-Report.pdf https://www.nist.gov/system/files/documents/2017/05/09/Time-... > Neither NIST-F1 nor NIST-F2 is operated as a clock and both are run only intermittently. https://www.bipm.info/utils/en/pdf/time_ann_rep/Time_annual_report_2014/17_PSFS2014-NIST_TAR14.pdf https://www.bipm.info/utils/en/pdf/time_ann_rep/Time_annual_... Devices like F1 are used to correct hydrogen masers which are extremely stable but have systemic errors in frequency. Unlike the masers, they don't run all the time, or (or last I saw-- anywhere close to most of the time, though I'm not quickly finding a link with operating stats).
  - 6y ago

teej 6y ago

> “As of 2013, NIST-F1 has an uncertainty of ..., which means that it would take 100 years for the clock to be off by a second” This didn’t sound right to me. The clock being off 100ms every 10 years sounds terrible. This must be a typo because the source says: “... which means it would neither gain nor lose a second in more than 100 million years!”

PaulDavisThe1st 6y ago
"1999 — NIST-F1 begins operation with an uncertainty of 1.7 parts in 10 to the 15th power, or accuracy to about one second in 20 million years, making it the most accurate clock ever made (a distinction shared with a similar standard in Paris)." https://www.nist.gov/news-events/news/1999/12/nist-f1-cesium-fountain-clock https://www.nist.gov/news-events/news/1999/12/nist-f1-cesium...
lucaspauker 6y ago
Good catch. It should read 100 million years, not 100 years. Website is updated now.
hacker_newz 6y ago
I was surprised by all the inaccuracy in this blog post until I realized it was written by an algo intern.

HenryKissinger 6y ago

The insurance company I used to work at had legit scientists - people with masters and phds in fields like hydrology - to help develop loss models for property & casualty incidents. I'm half joking when I say that the first company to come up with a technology to travel faster than light will be a bank or a hedge fund or a high frequency trading firm. Hire the top theoretical physicists in the world for 7 figure salaries, certainly more than they could ever make in academia or research labs - and throw them at the problem. If a company is willing to spend $300m for a 3ms advantage, imagine how much one would be willing to spend for literally instantaneous transactions.

dpratt 6y ago
Considering that your hypothetical solution would violate causality, there’d be quite a bit more than a $300 million gain from it.
- JackFr 6y ago
  http://www.princeton.edu/~pkrugman/interstellar.pdf http://www.princeton.edu/~pkrugman/interstellar.pdf Krugman has addressed arbitrage between inertial frames.
lucaspauker 6y ago
You're right however this isn't possible with our current understanding of time: https://en.wikipedia.org/wiki/Spacetime https://en.wikipedia.org/wiki/Spacetime

jeffbee 6y ago

This article from today is somewhat obsolete. MiFID II regulations require absolute accuracy of either 100 microseconds or 1 millisecond depending on certain conditions, and reporting in microseconds. I don't know why they went with microseconds when nanoseconds would have been technically just as practical and far more future-proof. https://ec.europa.eu/finance/securities/docs/isd/mifid/rts/160607-rts-25-annex_en.pdf https://ec.europa.eu/finance/securities/docs/isd/mifid/rts/1...

lucaspauker 6y ago
Europe regulations are different than US regulations and are more stringent, as pointed out in the article you linked. I focused on US rules for the article on my site.
RyanHamilton 6y ago
>>technically just as practical What makes you think that? My experience has been that getting closer to perfection requires increasingly more effort as you approach it. In this case, having a larger limit would allow monitoring and correction in case of an error without any kind of "trip" being triggered.
- lucaspauker 6y ago
  You're right. The more fine-tuned it becomes, the more you have to consider low-level protocols. This paper https://nvlpubs.nist.gov/nistpubs/jres/121/jres.121.023.pdf https://nvlpubs.nist.gov/nistpubs/jres/121/jres.121.023.pdf suggests with current systems, time uncertainty can be decreased to about 1-10 us from NIST.
- jeffbee 6y ago
  It doesn't really matter if the last three digits are just noise for the time being. It's just as practical, from the programmer's standpoint. 64 bits worth of nanoseconds gives abundant range (±292 years from the origin) and microsecond times already necessitate a 64-bit representation (2^31 microseconds only gets you half an hour). So you can build all your protocols around signed 64-bit nanos from a defined origin and never need to change it again.

vhiremath4 6y ago

> In order to do it, they bored through mountains in Pennsylvania in order to make the path of the wire as straight as possible, reducing the distance information had to travel. In total, the project cost \$300 million. The result? They can send information in 13.3 milliseconds round trip, 3 milliseconds faster than the competition at the time. So we can see that a 3 millisecond edge is worth at least \$300 million. I understand the motivation and rationale and that my take here is subjective, but I take a pause at how sad it is that we're literally boring holes through our natural mountains in order to flip bits 3ms faster in the name of high frequency trading.

deleted 6y ago
[deleted]
1123581321 6y ago
Try not to think about the infrastructure dug and bored so we can make comments here. :)
iancmceachern 6y ago
Exactly. Because it doesn't generate real value. Lets compare to alternatives like dam and flood control infrastructure, better roads, rail, etc. I understand the real pragmatic benefits and return on investment from these. A farm field is irrigated, a home not destroyed, less fuel used in trucking, on and on. These investments generate real value because they increase the total of societal output, not just that particular factions slice of the pie. Meaning, you are finding new gold to mine, not just taking over part of your neighbors gold mine and saying you are adding value. Its not adding value to the overall economy. Please help me, what real value does an investment like this yield for the economy as a whole? As i understand it an investment like taking part of your neighbors gold mine, not mining new ground. Effectively they have increased their slice of the pie, in this case it is time not land, but not made the overall pie bigger. It is interesting to think about things this way, in terms of investments that increase the carrying capacity of our economy, and those that don't. Advertising comes to mind. The cola wars, while expensive, dont yield a net increase in cola drinking, just a relative difference between the brands. Same with beer, on and on.

dmurray 6y ago

Tl;dr: "If exchange clocks are imprecise--say they are only accurate to one second--and a HFT can execute many orders in a second, then the exchange could reorder all the trades in the second in any way they want, without being detected by an auditor!" This is the only sentence in the article relevant to the title. Auditors need to insist on good timekeeping to prevent exchanges from committing fraud. HFT firms don't fundamentally care about having accurate clocks. They care about reacting first. Having good clocks is useful for second order reasons like debugging and regulatory compliance.

andylynch 6y ago
Clock sync is mostly for correlating events between distributed systems (like those feeding CAT). In the exchanges themselves, the ordering of events is better defined and often just done with sequence numbers on each matching engine or order book as messages arrive and events occur.
- dmurray 6y ago
  Exactly, the exchange can work just fine processing each message in order without worrying about absolute time. Absolute time is needed for reporting or auditing purposes.

lpage 6y ago

Most of this information is somewhere between incomplete and wrong. Accurate timekeeping (on exchange and otherwise) is crucial to latency-sensitive players in finance. I'll get to that after addressing the article. > For example, if I trade one microsecond faster than a competitor, the exchange needs to ensure that my order gets processed first. If the trading venue operates a price-time priority mechanism, the exchange should strive to ensure that orders receive the correct time-based priority, but there are no guarantees. Furthermore, priority and processing are separate considerations. The distinction between priority and processing is vital, given that order entry and market data distribution - both inter-exchange and intra-exchange - are challenging problems that aren't solved by accurate clocks alone. Much of the complexity of HFT at the systems level is there to deal with said complexity. Even for a single sender, messages (new orders, cancelation requests, etc.) can (and on some exchanges, often are) processed out-of-order. You, as a market participant, might place an order, send a cancel shortly after that, have the cancel rejected for referencing an order that does not exist, and receive an acknowledgment of your new order immediately thereafter [1]. That might or might not say anything about how good the exchange is at establishing match priority. But idealizing exchanges as systems that ensure fairness via a total ordering of events (by time or any other mechanism) glosses over the reality. Those details aside, what does "trade one microsecond faster than a competitor" mean? Network egress from the sender? Network ingress at the exchange? Exchanges are a distributed system comprised of order entry gateways and matching engines, so what determines ordering? If gateways are the arbitrators of order, do they use wall time or a shared frequency standard? If matching engines are, how are orders arriving from discrepant order entry gateways serialized? Those are systems problems, not clock problems. > HFT can execute many orders in a second, then the exchange could reorder all the trades in the second in any way they want, without being detected by an auditor! This isn't the threat model. What follows is also an oversimplification, but categorically, front running can occur in two forms. One involves the executing broker placing orders for their own account in front of a large client order and profiting from the market impact caused when executing on behalf of the client. Given that large orders executed incrementally, the timescales in question are minutes/hours/days, and microsecond accuracy clocks don't play a significant part in the detection or prosecution thereof. Microstructure level front running is a concern, but the nuances are s.t. accurate timestamps won't do much to detect abuse (they are important as evidence in an enforcement action). > How are Clocks Synced? Pretty much this whole section is wrong. In a way, it conflates how NTP (not IEEE 1588v2), one-way satellite time and frequency transfer, and GPS timekeeping work. Exchanges mostly use IEEE 1588v2 with GNSS synchronized grandmasters; they're not actively disciplining the grandmasters against each other, as this article suggests. Furthermore, accurate disciplining of the grandmaster is heavily dependent on a pulse-per-second (PPS) standard provided by the GNSS; the GNSS constellation almanac and time codes alone won't get you there. Outperforming a GNSS solution by synching grandmasters using something more exotic such as Two-way satellite time and frequency transfer (TWSTFT) is possible, but not done by exchanges (the economic incentives aren't there). Why do latency sensitive market participants care about timestamps? Backtesting. Quantifying uncertainty in one's system and connected systems is crucial, as is reconstructing a cross-venue series of events under a probabilistic framework. To the extent that an exchange has a regulatory obligation or pressure from market participants (who again, want accurate timestamps for backtesting purposes), they'll invest in accurate timekeeping infrastructure. Such infrastructure is way more commoditized now than it was 20 years ago. However, timekeeping is still a tricky problem, and disciplining a grandmaster is far from the most challenging part. [1] This is super annoying, and exchanges on the whole have gotten better about either engineering systems that don't do it at all, or do it infrequently even at HFT line rates. [2] https://tf.nist.gov/time/twoway.htm https://tf.nist.gov/time/twoway.htm

erikerikson 6y ago

Clocks are dominated by causality and ordering. This is why physics doesn't recognize "time".

gizmodo59 6y ago

The book flash boys is an interesting read on this topic. https://en.wikipedia.org/wiki/Flash_Boys https://en.wikipedia.org/wiki/Flash_Boys

__d 6y ago
Interesting, perhaps. But don't take it as an accurate, independent, researched recounting of facts, because it's a long way from that.

Nition 6y ago

I work in videogames and I don't know much about stock trading, but in games we often deal with networking problems like who shot first. It sounds like the central stock exchange is handling trades in a naive way like this: T = 0: Client A sends a trade from 200ms away T = 0.1s: Client B sends a trade from 50ms away T = 0.2s: Client C sends a trade from 100ms away T = 0.15s: Client B's trade arrives, process it T = 0.2s: Client A's trade arrives, process it T = 0.3s: Client C's trade arrives, process it What we usually do on a server (lag compensation by rolling back the enemy player's hitbox) won't work here, but I wonder if a version of what's usually called client-side prediction would work. In this case it would be server-side instead: At T=0.15s, Client B's trade arrives. It's timestamped as T = 0.1. We look at all trades since T = 0.1. There aren't any so we just process it. At T = 0.2s, Client A's trade arrives. It's timestamped as T = 0. We look at all trades since T = 0. Client B's trade was timestamped T = 0.1. *Roll back and resimulate all trades since T = 0.* Trade order is now A, B. At T = 0.3s, Client C's trade arrives. It's timestamped as T = 0.2. No trades since 0.2 so we process it normally. Trade order is now A, B, C. Most likely too complex and not actually feasible, just thought I'd mention it. The clocks on the remote clients would need to be synchronised with the central atomic clock so that their timestamps align correctly which might be tricky/impossible due to the extreme accuracy required. You also have to trust the client to not just fake their timestamp down a few ms.

lucaspauker 6y ago
Most (high frequency) firms pay for server space next to the matching engine. Wire length is standardized so you don't have these problems.
andylynch 6y ago
No- it would not work. exchanges and brokerages care about order of arrival rather than transmission, and for good reason. Anything else would be more complicated and much more open to gaming (the resimulation bit you propose would involve effectively cancelling the last transactions, probably quite frequently, and a huge incentive for at least B and probably C to have ‘inaccurate’ timestamps to get the trade they way at someone else’s expense)

alexchamberlain 6y ago

This may be a stupid question: the article explains why ordering of trades is important then explains that that means the clocks need to be accurate wrt a 3rd party clock; why? Doesn't it just matter that the order the trades were received in is recorded (and respected)? (Although I work in Fintech, I have nothing to do with the exchange trading side of things.)

andylynch 6y ago
The reasons mentioned in regulation are twofold- that it allows better reconstruction of activity across markets when monitoring for market abuse, and that it allows for a meaningful consolidated tape

GuB-42 6y ago

Related story. https://www.motherjones.com/kevin-drum/2013/09/somebody-stole-7-milliseconds-federal-reserve/ https://www.motherjones.com/kevin-drum/2013/09/somebody-stol... The story is: an announcement was made at precisely 2pm in Washington, and related transactions were made 2-3 milliseconds after that in Chicago, faster than the speed of light... Yep, finance defies special relativity. For some reason, insider trading is seen as a more plausible explanation than faster than light communication... But still, that level of precision is ridiculous.

pandaman 6y ago
Given that the distance between Washington and Chicago is ~950km and the speed of light is ~300,000 km/s I have a huge issue with trusting anything in the article which starts with " It takes seven milliseconds for this information to get to Chicago. ". It appears that 3ms for that trip is quite plausible, while 2ms is not. Given the opening misinformation and the whole "2-3ms" phrasing (why not exact timing of the earliest order, could 3.5ms be "2-3ms"? could 3.9ms?) the most plausible assumption that it's one of the early specimen of so-called "fake news".
- coolgeek 6y ago
  Even if the information got to Chicago in 3ms, you would still need time to process the information and generate a response. So trading on the information, from Chicago, 2-3ms after its release in DC seems implausible, if not impossible
  - pandaman 6y ago
    Sure, but how much time is needed to process that information? As far as I understand in this case it was a single bit (change rate yes/no). What is the minimum time you think is plausible for 1bit throughput?

jennyyang 6y ago

Why on earth would they pay $300M to have a fiber cable to Chicago? It sounds like they could move all their employees from Chicago to NYC for cheaper!

jlgaddis 6y ago
cf. arbitrage [0] -- [0]: https://en.wikipedia.org/wiki/Arbitrage https://en.wikipedia.org/wiki/Arbitrage

MR4D 6y ago

HFT is not the problem - the pricing is. Hear me out.... Today, you could have bought AMZN stock for $3442.93 at some point during the day. AMZN nominally has $0.01 price increments. To put that in perspective, 0.01 divided by the share price is 344,293 which means we can affect price in 1/344,293 of a share. That’s nuts, and actually removes liquidity. Instead, pricing change minimums should be a percentage of a share. I would think 1/10,000th of a share would be more than enough. Honestly, for most stocks, a nickel difference wouldn’t matter and the liquidity would be better. —- EDIT : meant to also add that change the time minimums to also be larger (say 1/10 of a second) would also help liquidity and remove the need for HFT. So, timing/pricing deltas can either increase or decrease the need for HFT.