These high frequency traders typify the harmful Wall St. attitude with which America's twenty-somethings are enamored. It really needs to stop.
Let's compare business to football.
Some people become experts in training, coaching and playing football. Others manage teams and learn how to spot talent and work with dynamics between players to create winning combinations. They're trying to raise the bar and increase the level of competition within the game.
Then there is a class of people who don't really add anything to the game, but they want to profit off of it. These are the gamblers.
High frequency traders are like meta-meta-football players. They try to profit off transactions between the gamblers.
Frankly, I don't know how they can look at themselves in the mirror. I wish they would put their minds to good use and actually solve real problems instead of meta ones.
Your post is a jumble of invalid ideas that, to me, merely expresses your contempt of modern day Wall St. You're completely entitled to your opinion, but you should be more aware of exactly who it is you are pissed off at. You certainly should not typify anyone on Wall St as "harmful," especially when you do not know exactly what they are doing.
The article does not explain what the high frequency traders, specifically, are doing. But it is by no means necessarily evil. All they are doing is two things: they get their trades into the system quickly, and they get current market conditions quickly.
If there is anything that you should quarrel about, it is that their system is automated. But, still, at the end of the day they're the ones holding the bag. If they blow up, they're going to pay for it.
If they start packaging their complicated and automated trading algorithm as a "bond" and get it AAA rated, and then start selling it to pension funds, then you've got a reason to be pissed.
Your gamblers vs. players analogy doesn't really work. The high frequency traders are playing the same game that traditional traders are playing. They just pay for a bit of an advantage in how the game is played.
Whether or not this is an unfair advantage is up for debate.
it seems like arbitrage is often presented as somewhat negative. floating exchange rates between fungible commodities (and the arbitrage opportunities that accompany them) are a feature not a bug. they allow markets to correct for fluctuations in supply and demand very quickly ensuring more efficient resource distribution.
arbitrage being available exclusively to a small group who also control membership to their own group? corporatism, and obviously bad. this problem of the financial world having insiders and outsiders has nothing to do with high speed arbitrage, that's just an illustration of it.
actually, a lot of the best high frequency trading shops out there are small, private, prop trading groups. for example, tower research capital (http://www.tower-research.com/) is a pretty successful high frequency shop that isn't a big bank. it was started from scratch by mark gorton, the guy who created limewire. there are tons of high frequency shops making tons of money who are just like this.
Fluctuations in supply over milliseconds aren't causing an inefficient distribution in resources though. There is an inefficiency here though in the extraction of wealth from the financial system without a corresponding input simply by making high-frequency transactions.
What resources were you thinking of?
The only resource I can think of that needs instantaneous variation in supply is electricity. Logistics of distribution mean that supply of most other things will only be variable on the order of 6 hours or so. Or do you mean supply of shares to be traded?
As an outsider, trading of securities and derivatives appears to be a long way from the initial goal of optimising the market and providing capital.
Thinking aloud: If trades were pegged to a single time each day (per market) how would that affect the goal of supplying capital (I'm guessing it wouldn't really)? It would reduce liquidity by quantising it in step with the market but would that be harmful?
I'm sure someone will point out to me why, beyond making traders less wealthy, that's a bad idea?
The fact that server proximity plays are role in trading advantages seems... wrong. I'm not sure that it matters, but I think most people have a general aversion to gaming the system.
it's not really gaming the system. if you have money, you can buy server space close to the exchange's computers. that may seem unfair, but that's not really unique to trading. consider manufacturing: if you have more money, you can buy a bigger factory and leverage economies of scale to make your widgets for cheaper; that's a competitive advantage.
"When billions are made on millisecond-level trade throughput, having your server right next to the server that executes your trade is worth a lot more than $4,000 per square foot, it’s priceless."
It's actually not priceless. If the space is truly that valuable, the price will keep rising to the point where the profitability decreases relative to the risk. The risk inherent in this is also key. If you are buying and waiting for the uptick, and then it goes down...
If they could all agree on a third-party timing and signing methodology, this would be a non-issue in my opinion. Gaming it? Sure, but make the fines insane, and use the actual timing (whatever it is) for auditing.
How important is physical proximity, really? An electrical signal can travel 186 miles in a millisecond. So locate the servers in cheaper real estate 10 miles away an you lose like about .1 millisecond round-trip. If that really makes a difference in trading success something is really screwed up.
First off, high frequency traders are making their money off of how quickly they react to the market conditions. The quicker they react, the more money they make. In this sense, if they trade at high enough volume, it's worth paying more for a lower latency. This is, of course, assuming they are good at what they do. If they are bad at what they do, a lower latency wouldn't harm.
Second, they are in a competitive environment. If they want to make money off of obvious arbitrages that their competitors are likely engaged in as well (very likely in the forex market), they need to react first.
I assume that physical proximity reduces latency in ways other than the time it takes for photons to travel through fiber optic cable, for example router hops.
>> On: Trading success based on latency
In Forex (the currency exchange), there are sometimes very obvious arbitrage opportunities. You can take your Dollar, and trade it into Euros. Then, go from Euros to Yen. Then, go from Yen back to Dollar -- and end up with more dollars than you started with! Of course, after a certain amount of money flows through, the market will adjust itself and the arbitrage will vanish.
Being the first to react to this arbitrage allows you to realize and profit from the arbitrage before anybody else does.
The latency in the network has more to do with the networking equipment than the transmission speed. Also routing can often cause longer return times and dropped packets.
Paying the high price ensures that their transactions don't leave the building and all of the equipment in the middle is optimised for that type of operation.
The only other solution would be 10 miles of dedicated fibre through a metropolitan area. Not a cheap solution.
Worrying about how "high frequency traders" are making so much money is like worrying about VCs making so much money. The best will make a lot, everyone else will break even or lose money.
[+] [-] mrshoe|16 years ago|reply
Let's compare business to football.
Some people become experts in training, coaching and playing football. Others manage teams and learn how to spot talent and work with dynamics between players to create winning combinations. They're trying to raise the bar and increase the level of competition within the game.
Then there is a class of people who don't really add anything to the game, but they want to profit off of it. These are the gamblers.
High frequency traders are like meta-meta-football players. They try to profit off transactions between the gamblers.
Frankly, I don't know how they can look at themselves in the mirror. I wish they would put their minds to good use and actually solve real problems instead of meta ones.
[+] [-] sam_in_nyc|16 years ago|reply
The article does not explain what the high frequency traders, specifically, are doing. But it is by no means necessarily evil. All they are doing is two things: they get their trades into the system quickly, and they get current market conditions quickly.
If there is anything that you should quarrel about, it is that their system is automated. But, still, at the end of the day they're the ones holding the bag. If they blow up, they're going to pay for it.
If they start packaging their complicated and automated trading algorithm as a "bond" and get it AAA rated, and then start selling it to pension funds, then you've got a reason to be pissed.
[+] [-] bhousel|16 years ago|reply
Whether or not this is an unfair advantage is up for debate.
[+] [-] nazgulnarsil|16 years ago|reply
arbitrage being available exclusively to a small group who also control membership to their own group? corporatism, and obviously bad. this problem of the financial world having insiders and outsiders has nothing to do with high speed arbitrage, that's just an illustration of it.
[+] [-] andylei|16 years ago|reply
[+] [-] pbhjpbhj|16 years ago|reply
What resources were you thinking of?
The only resource I can think of that needs instantaneous variation in supply is electricity. Logistics of distribution mean that supply of most other things will only be variable on the order of 6 hours or so. Or do you mean supply of shares to be traded?
As an outsider, trading of securities and derivatives appears to be a long way from the initial goal of optimising the market and providing capital.
Thinking aloud: If trades were pegged to a single time each day (per market) how would that affect the goal of supplying capital (I'm guessing it wouldn't really)? It would reduce liquidity by quantising it in step with the market but would that be harmful?
I'm sure someone will point out to me why, beyond making traders less wealthy, that's a bad idea?
[+] [-] hvs|16 years ago|reply
[+] [-] andylei|16 years ago|reply
[+] [-] mattmcknight|16 years ago|reply
It's actually not priceless. If the space is truly that valuable, the price will keep rising to the point where the profitability decreases relative to the risk. The risk inherent in this is also key. If you are buying and waiting for the uptick, and then it goes down...
[+] [-] sam_in_nyc|16 years ago|reply
[+] [-] th0ma5|16 years ago|reply
[+] [-] newsdog|16 years ago|reply
High frequency trading is cheating. Ban it.
[+] [-] shrughes|16 years ago|reply
[+] [-] sam_in_nyc|16 years ago|reply
Or, is it the frequency that you think should be banned?
[+] [-] mtraven|16 years ago|reply
[+] [-] sam_in_nyc|16 years ago|reply
First off, high frequency traders are making their money off of how quickly they react to the market conditions. The quicker they react, the more money they make. In this sense, if they trade at high enough volume, it's worth paying more for a lower latency. This is, of course, assuming they are good at what they do. If they are bad at what they do, a lower latency wouldn't harm.
Second, they are in a competitive environment. If they want to make money off of obvious arbitrages that their competitors are likely engaged in as well (very likely in the forex market), they need to react first.
I assume that physical proximity reduces latency in ways other than the time it takes for photons to travel through fiber optic cable, for example router hops.
>> On: Trading success based on latency
In Forex (the currency exchange), there are sometimes very obvious arbitrage opportunities. You can take your Dollar, and trade it into Euros. Then, go from Euros to Yen. Then, go from Yen back to Dollar -- and end up with more dollars than you started with! Of course, after a certain amount of money flows through, the market will adjust itself and the arbitrage will vanish.
Being the first to react to this arbitrage allows you to realize and profit from the arbitrage before anybody else does.
[+] [-] spectre|16 years ago|reply
Paying the high price ensures that their transactions don't leave the building and all of the equipment in the middle is optimised for that type of operation.
The only other solution would be 10 miles of dedicated fibre through a metropolitan area. Not a cheap solution.
[+] [-] pchristensen|16 years ago|reply
[+] [-] mikeytown2|16 years ago|reply