Stock Market Manipulation By Millisecond Trading 624
cfa22 writes "Nice piece in the NY Times today on ultra-fast trading on the NYSE and other markets. The 'algos' that make autonomous trading decisions have to be fast, but I wonder: Is network speed ever a bottleneck? Can anyone with inside experience with millisecond trading provide some details for the curious among us regarding hardware architectures and networking used for such trading systems?" According to the article, high-frequency traders generated about $21 billion in profits last year.
Profits, but for whom? (Score:3, Insightful)
Traders make a profit on each trade. But the profit is always to the broker.
Ultra fast trading is an interesting idea and done right it can lead to successful short term returns, but if you take a Ferrari around a hairpin at 120mph, you're still going to hit the wall and die.
1588v2 aka Precision Time Protocol Version 2 (Score:5, Insightful)
I believe that precision millisecond stock trading globally is the real reason behind the IEEE 1588v2 precision time protocol. The cisco 9000 enterprise switch supports it. Support has been lacking in smaller switches. The only other group using PTPv2 is the cell phone industry.
The interesting part of PTPv2 for me is that it is used in the 802.1AS protocol ( http://www.ieee802.org/1/pages/802.1as.html [ieee802.org] ) which is one of the foundations of Audio Video Bridging (AVB) http://www.ieee802.org/1/pages/avbridges.html [ieee802.org] - Which allows for real time low latency low jitter media streams transported via ethernet with guaranteed bandwidth.
Just yesterday I was joking with friends: Forget about stealing the rounded pennies from bank accounts, criminals could re-program the PTPv2 implementation in switches to steal milliseconds of time during trading!
Anyways, back on the original question, no, network speed is not so crucial once all of your packets are properly timestamped.
--jeffk++
Re:Free Market working A-OK (Score:4, Insightful)
My reading of the article brought out the point that, for a few extra bucks, you can actually go to the head of the line - giving the window of opportunity to perform the other actions described. Interesting definition of "free market" ...
Re:Great future (Score:5, Insightful)
Lol.
I often do wonder how we ended up here. Most of the wealth of the world is held not by its citizens, but by corporations. Corporations are owned by funds, which are owned by investors which... and by the time you drill through the obfuscation there seems to be nobody that actually accounts for most of the wealth created by the people that actually produce stuff.
And then you have the wall street leeches who juggle numbers around and suck millions out of... what exactly? The world is not richer for them in any material sense.
All the while I'm wondering why the day I can retire seems further and further away despite massive advances in technology. Shouldn't we all be creatures of (comparative) leisure by now?
Re:Free Market working A-OK (Score:5, Insightful)
The problem is the start-up cost. Buying the necessary hardware, obtaining the required data sources, developing the necessary analytical formulas and coding them efficiently costs a *lot* of money. So it's the free market of people who already have a lot of money and time, or simply an enormous amount of money.
I'm not entirely against it in some cases; well implemented it can smooth out market fluctuations and value securities more accurately. But it still makes me squeamish: It's yet another mechanism by which the rich get richer, and the poor get left behind. Every trade a "normal" person makes will end up costing a small amount more, and the difference goes into the pocket of the HF funds. It feels very much like the "shave the fractional cents off interest calculations" scam: No one suffers individually suffer, but it still feels wrong.
Re:Human reaction bottleneck (Score:3, Insightful)
The algorithms trade on their own, all the humans do is define the mechanism to evaluate trades and set limits
Human arbitrary decisions applied blindly by a machine thousands of times per seconds. That sounds like a real winner to me.
Re:Profits, but for whom? (Score:1, Insightful)
By eliminating inefficiency is the standard rhetoric.
Exploiting arbitrage opportunities by definition causes them to disappear.
Re:Profits, but for whom? (Score:3, Insightful)
But how does this kind of stock trading benefit anyone other than the traders themselves?
It doesn't other than inflating/deflating the perceived value of a company. It's a method to speed up the "productive citizens"->"traders/middlemen" transfer.
An abuse of the free market system. (Score:5, Insightful)
This kind of activity is an abuse of the free stock market system.
This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.
People should look down on this kind of business and method of trading.
Almost Front Running... (Score:3, Insightful)
Front Running [wikipedia.org] is when the broker or market maker (eg, Nasdaq) does such behavior.
Although the high frequency trading is slightly different, it is almost electronic front-running, especially with the ability to PULL the orders unfufiled after a few milliseconds.
Re:An abuse of the free market system. (Score:1, Insightful)
This kind of activity is an abuse of the free stock market system.
This activity does not generate wealth. It doesn't create something from nothing. And it doesn't add value to society. If they generated 21 billion, then 21 billion was necessarily lost by others.
People should look down on this kind of business and method of trading.
That's like saying that Lowes lost money because I bought my bathtub at Home Depot. Just because you wanted the stock at a lower price doesn't guarantee you that price.
Re:Human reaction bottleneck (Score:4, Insightful)
Re:An abuse of the free market system. (Score:5, Insightful)
You're wrong.
High frequency trading means that more trades happen in general. This extra competition to fill orders drives down the difference between the buy and sell prices and greatly reduces arbitrage situations (ie, the difference in price between the same stock listed on different exchanges and possibly in different currencies).
So, if you buy or sell a something, you're giving less money to the market-makers and you're getting a more "correct" price. It levels the playing field.
And it's true that arbitrage and hifi trading are a zero-sum game. That's why it's an arms-race at this point.
Re:Profits, but for whom? (Score:5, Insightful)
In this case, that is not quite what 'liquidity' means. When you discuss 'the liquidity of assets' you're generally referring to how easily and cost effectively those assets can be converted into cash or other, spendable assets. However, liquidity of a stock/bond/credit in this context is referring to how much that market is actively being traded. A liquid market is constantly moving, an non liquid market is stagnant. Theoretically, the more liquid a market is, the closer it's price is to its actual market value. This is related to the other kind of liquidity, as if you have an investment in a stagnant market, it would be very difficult to sell and turn into cash, but in a financial market context, that's not really what they're referring to.
Re:Profits, but for whom? (Score:4, Insightful)
But we now have clear evidence that the real cost to society of these behaviors is not in billions but in trillions of dollars.
It's like ignoring the price of having the U.S. Army all over the world protecting oil interests in the real price of oil.
The average bonus on WS less than a year after these companies were going bankrupt was over half a million dollars.
Corporations have been hijacked by the executive class for their own benefit- not societies benefit.
Lay 6,000 people off and get a 100,000,000 dollar bonus. But you can only buy 5 or 6 tv's and 3 or 4 cars. So overall demand for product is reduced.
I now have 4 friends laid off and three who are on the edge of being laid off. These are college educated folks with 10 year's experience.
When are we going to stop all this behavior by 2% of the population which is hurting the other 98%?
Re:Great future (Score:5, Insightful)
TI'm just wondering why the average Joe has to work as hard as ever and still has a struggle to provide for his (ever retreating) retirement, when traders trade in more than enough for everyone.
I guess that makes me a socialist or something.
I am sorry, I don't work near as hard as my father did. I would have trouble convincing my grandfather that I work at all. Your question doesn't make you a socialist, it makes you an idiot who has no idea what life was like for people through most of history (and still is in much of the world).
Re:Profits, but for whom? (Score:5, Insightful)
All you needed to stop were the bailouts. The behavior at that point would have corrected itself since many of these companies would have been out of business.
Re:meh (Score:3, Insightful)
They're gonna screw up before long...
Before long? It happened last fall; the Dow Jones lost half its value and now people are being laid off right and left, and states are going broke.
Of course, it wasn't just letting computers do stock trading, but the idea behind it was - short term selfish interest, lack of ethics (Bernard Madof was head of NASDAQ while he was bilking people with his ponzi scheme), and all around sociopathy and incompetence by business, political, and moral leaders.
The stock market isn't supposed to be a casino, it's supposed to be for long term investment.
Those who refuse to learn from history [virginia.edu] are doomed to repeat it.
The very same problems that caused the Great Depression (including land speculation and underregulation) caused our present economic meltdown.
Re:Great future (Score:3, Insightful)
Re:Profits, but for whom? (Score:5, Insightful)
I think your question speaks (to me at least) of a more basic question. Do all actions have to be to benefit 'others' in your opinion? I think most actions most people take, are soley to benefit themselves....especially where money/wealth is involved. I don't see anything wrong with that...but, it almost sounds like you do?
Are you implying that nothing really should be allowed to happen unless it benefits society as a whole rather than a single or few individuals?
Just curious...your question just really struck me strangely what what I thought I heard in it.
Re:Bogus artilce by clueless arts graduate (Score:5, Insightful)
You seem to delight in the fact that the author got an undergraduate degree in History before his Harvard MBA. Either you have an MBA from a competing school, and think that Harvard MBAs don't have to work as hard as other folks, or you have NO MBA, and believe that your "life experience" is better than any graduate degree. Neither qualifies you to judge "arts graduates" as a whole.
This is an outstandingly bogus article, what happens when arts graduates attempt to understand anything except celebrity gossip.
>"The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders."
That's really quite amazingly precise. So precise that I believe not a word of it.
Yes, by all means let's distrust "precise" figures -- you probably ignore facts as well.
I can arrive at a slightly more accurate figure with some simple math. The stock opened at $26.20. The threshold being exploited was $26.39, 19 cents above the opening price. If we allow a for a 5 cent rise from the opening stock price (supposition on my part, but I think it's reasonable to guess that the price moved before the exploits occurred), then the algos gained $0.14 per share on 56,000 shares (from TFA), equaling -- huh, look at that -- $7840.
Not bad for a BFA, if I say so myself.
Re:An abuse of the free market system. (Score:5, Insightful)
High frequency trading is based on exploiting knowledge that isn't available to everyone. Its akin to insider trading and should be regulated.
Lets say that a company announces something that means big profits. Lots of people then place orders to buy. Due to a special agreement with NASDAQ or whoever, a high frequency trading program will see these orders getting ready to be placed and make their orders a fraction of a second before everybody else. So they get the stock for slightly cheaper and then sell it off quickly for a profit. They end up making money off the people that don't have access to high frequency trading. They don't make a lot off of each trade, but they make up for it in volume.
If this is allowed to continue, the markets will lose their credibility. Hopefully they will either self regulate or government intervention will take care of the problem.
Re:Profits, but for whom? (Score:5, Insightful)
Amen to that brother.
What they did is going to make it happen again within the next 20 years instead of the next 60 years.
Re:Profits, but for whom? (Score:3, Insightful)
You can't cheat an honest man.
If you could make an easy living simply trading stock, everyone would do it. Really, the stock market would be full of people trying to make a quick buck out of nothing. And half of them go broke while the other thrives. The stock market is at worst a lottery or pyramid scheme, but it doesn't bankrupt poor hard working joes if they're working for honest and truthful companies. Or companies that are too small to survive on the publc trade floor.
But other than that, do you think anyone can tell the "real" value from the "perceived" value of anything as comples as a publicly traded enterprise? If the real and perceived values differed, who would NOT cash in on the margin?
This is what the guillotine was for. (Score:5, Insightful)
Sometimes you have to remind people that *everyone* is touchable.
Re:Profits, but for whom? (Score:3, Insightful)
NO
You "avoid" the bailouts, and you drown the 98% with the upper 2%'s greed.
They did the right thing, the government prevented large companies from destroying Main St. and they also opened EVERYONE's eyes to the fact that corporations nearly took everything from everyone.
Re:Profits, but for whom? (Score:2, Insightful)
Maybe he's someone who thinks for himself, and who doesn't toe anyone else's party line, at least not without an explanation of the reasoning and utility behind it.
Re:Profits, but for whom? (Score:4, Insightful)
On the way down, the desperate management strips as much out as they can, in self-awarded bonuses and by running as much of the inbound cashflow through - extracting more money from other corporations so that they are damaged - and constraining outbound. The end result is more collapse and economic suffering, not less.
The alternative to this law-of-the-jungle, Libertarian no-tax, no-fed-money "ideal" is progressive taxation. It's an existing mechanism for inhibiting John Galt from excessive, unwarranted greed, and it can be used to redistribute wealth in a directed fashion. For example, to fund a health care system that provides health care for all. Western civilization would still be a good idea.
Re:Profits, but for whom? (Score:4, Insightful)
When are we going to stop all this behavior by 2% of the population which is hurting the other 98%?
When you vote them out of office. That's when.
Re:Profits, but for whom? (Score:3, Insightful)
Do you have any links, books you could recommend to someone that would like to learn about and start investing in the market on their own...outside the normal 410K route?
Re:Profits, but for whom? (Score:4, Insightful)
And where would all of the employees who work for those companies be working, in this hypothetical scenario?
And how are all of the other companies in the US going to stay in business and avoid layoffs themselves if all of those other people are now out of work and unable to purchase goods and services?
I think you have an extremely unrealistic view of how fast the market can rebound to several large companies going out of business and laying off that many employees.
Re:Profits, but for whom? (Score:4, Insightful)
And how exactly, would you have stopped the bailouts?
The government works for those corporations, most of the people who made those decisions were former CEOs of those same comapanies. Notice how Bush's henchmen, who started the whole "bailout" thing, were former Goldman Sachs people? And which company benefitted from the others going under? Goldman Sachs.
Oddly enough, those on Slashdot who scream about the 2nd amendment, never took up their guns and killed Congress and the President when they should have. Our country was stolen from under our noses, and the 2nd amendment people were too worried about Obama and his funny name or that he might "take away their guns" to notice that the very purpose for which there even is a 2nd amendment, was pushed out in front of them, and they didn't do shit.
Re:Profits, but for whom? (Score:5, Insightful)
No, it doesn't.
I think our entire society (Except stock traders) would be a hell of a lot better off if you were required to own stock for six months.
People might actually start purchasing stock based on actual company performance. They'd start expecting to make money via dividends, aka, company profit, instead of random fluctuations in the price caused by CEO manipulation.
Like the CEO, oh, firing half the workforce to cause an upward stock price bump for two months, so they get their bonuses. Oh, and incidentally cripple the company, but what the fuck do they care, they're out the door to another company.
Stock ownership is company ownership. It is not a fucking bingo game. Although if that existed by itself, that would be fine...the problem is that the idiotic bingo games get play by the board, which starts operating the company for the benefit of the bingo game, instead, of, I dunno, the actual company.
As a lefty, I'll complain when companies put profits ahead of employees, but hell, they've stopped doing even that. At least that system worked somewhat. Make the workers too unhappy, abuse them too much, and you don't make as much money.
Now the people running the company are rewarded solely based on an idiotic bingo game, which bears no relationship to how much money the company makes. And it doesn't matter how much the workers abused, because the actual business of actually producing goods and services is irrelevant to the paycheck of the people at the top.
Until the entire company collapses, at which point they walk out the door with a shitload of money and head to another company, whose board will happily hire them because it will make their stock go up. Which they can sell to poor unsuspecting suckers, and walk away with a lot of money to pour into the next business, building it up as an actual industry, until they can hire a stock-pricing oriented CEO and suck all the cash out of that stock, too.
Re:Profits, but for whom? (Score:4, Insightful)
Can someone explain to me the benefit to society of this kind of activity? I get how the stock market is beneficial, generally allocating resources according to the merit of the business ventures involved, investing capital where it will produce goods/services/jobs, and so on. So despite being a social lefty, I'm not anti-capitalism or anti-stock-market; it has risks and flaws but it works. But how does this kind of stock trading benefit anyone other than the traders themselves?
The theoretical benefit of having a stock market is that it allows small amounts of capital from many people to be pooled into larger amounts to undertake business ventures. In private ventures between gentlemen, there wasn't much liquidity (ability to sell stock for cash in an emergency) so there was an understandable reticence to invest too much money in any given scheme. There's also the issue of liability and so forth and how the maximum risk borne by the investor could include his entire fortune.
So you get the idea of a corporation and the investor's maximum loss is the amount he invested. Put up $10k and it goes tits up, you're only out $10k. Of course, you try setting up a corporation or LLC yourself and get a bank loan and the bank is going to demand you sign a personal letter of credit thus you're back on the hook.
But let's say you have your corporation, it's not privately held but open for the public to buy shares. You still need the market. This provides a means for the investor to buy shares in your company and an ability to sell them for whatever reason when cash is required. The market for issuing new shares of stock is the primary market; the market for selling outstanding shares is the secondary market. So you feel comfortable buying $10k of Red Hat stock because you know if you ever need access to that money, you can liquidate your position. Your investment strategy would try and anticipate what your cash needs will be -- if you think you'll need it in six months, you're probably in commercial paper, if you need it sooner than that, you might just keep it in the bank.
All of what I've said above can be good and noble. The problem is that you can end up with people playing with the rules to rig the game. For starters, the stock market was never intended to be the domain of the average citizen. Wealthy individuals and bankers bought and sold stocks, not Joe Public. But Wall Street needs a constant stream of new suckers to take the losing side in bets and so companies started doing the whole 401k thing to get fresh streams of capital to fuck and despoil. And you get the game players who try all sorts of tricks to fuck people out of their positions. Let's also not forget that there are speculators, gamblers, and unsavory business criminals running their little cons.
It's the same basic human nature that ruins things like insurance. Insurance is a great idea -- you give up a portion of your money and in return you know your ass is covered if the worst possible thing happens. The idea is that only a handful of all the policy holders could suffer at any one time. If you were in an Amish community you could rely on barn raisings and the like and for a business this is the same idea. But then greedy fucks got involved. All the basic scams and cons that could be run against the industry were figured out hundreds of years ago. Buying insurance against something you did not own and did not have an interest in seeing preserved was outlawed by Parliament in what was it, 1790 something? But that's basically what the derivatives crisis is about and it's still legal in America to this day.
To get wealthy honestly can sometimes come quickly but for most it takes time and effort; to get wealthy quickly usually requires crime and if the crime isn't even against the law, so much the better. Note how the regulations put in place after the Great Depression were lobbied against and removed, thus paving the way for our current mess.
Re:Profits, but for whom? (Score:5, Insightful)
Supposedly, yeah. But the big trading houses are doing this. There is no way a human can do millisecond trading.
More like, eaten alive. How many little guys you know have the computing horsepower, software, and bandwidth of one of the major trading houses? Think your 4 GHz Intel box on a cheap DSL can outthink and outmanuever a couple networked Crays on the same T3 as the Exchange? Online trading is quite simply a good way to get eaten for lunch. All it's done is supply more suckers who have NO business in the stock market their opportunity to get bankrupted. And the market is ALWAYS hungry for more suckers. It's the only legal Ponzi scheme out there.
Re:Profits, but for whom? (Score:3, Insightful)
Except that those small companies operate in an environment dominated by large corporations, which most certainly will engage in all imaginable shenigans to increase their market value so the management gets to cash their stock options. When shit hits the fan, and these corrupt giants crash, the cascade effect will harm every company, and thus their employees.
Re:1588v2 aka Precision Time Protocol Version 2 (Score:5, Insightful)
As an investor (which is the term the article is using--among whom are you and I), you had better not be trading like these traders. These traders are Market Makers [wikipedia.org], which are specialized traders that provide liquidity (a very important thing) to the market. If you don't have real market makers, then the stock market is going to look like what Mortgage Backed Securities look like right now: there will be periods of time when nobody wants to touch the stuff, and if you are an investor, you are truly screwed if you need to buy or sell your security.
These market markets are looking to capture a spread (the cost to buy or sell)-which by the way is much better for the investor than 5, 10 or 20 years ago--capturing a fraction of a penny a billion times a day. The key component to a market maker's success or failure is understanding supply and demand. This was true even before the computers came in. The computers can only detect it much faster, so you get what you mentioned first--better price discovery. It's not that the investor is getting screwed out of 20 cents, it's that they're not getting the 20 cent discount they used to when the market makers were humans standing in the pits.
As an investor, you really shouldn't care if you get Broadcom at $26.20 or $26.40. Yeah, it's nice if you get it for the cheaper price, but the reason you're buying Broadcom is because you think it's a good investment, and if $0.20 ruins that investment for you, then I guarantee it's not a good investment.
The $0.20 might ruin a day-trader's day, but day-traders are not investors nor market makers. You and I are not day traders. The only thing the electronic market makers ("high-frequency traders") ruin are slower, human-based market makers' profits and day-trader's profits. It's certainly not worth an article in the New York Times.
Re:Profits, but for whom? (Score:4, Insightful)
There's a difference of scale between the everyday actions of average people and massive manipulation of stock market by rich traders. The actions I take, for example, will significally affect only me and a few other people, who are - and this is the important part - are capable of defending themselves from possible harmful effects, being of roughly equal power than me, or at least in the same order of magnitude.
On the other hand, as the ongoing recession shows, fucking around with huge economic assets to make a few dollars more can have a massive negative effect on lots of people who have absolutely no way whatsoever to defend themselves from the fallout. And even if they won't lose their job as companies collapse left and right, they still get to pay the bill of trying to keep what's left of the economy from collapsing further, and in time putting it back together - all the while knowing that the next bunch of businessmen is already getting ready to try their "clever" new methods.
Great power brings great responsibility. People who wield such power but refuse to consider anything except their personal profits are a menace to everyone else, and need to be stripped of enough of that power to no longer be a threat; otherwise you get Enrons. The common way of doing this is through regulating the ways in which power can be used. This is something libertarians, neoliberals and adherents of related ideologues have trouble understanding, presumably due to their failure to comprehend any form of compulsion besides outright violence as an exercise of power over anther.
Re:Profits, but for whom? (Score:3, Insightful)
It seems clear that societies should protect themselves and that means a constant evaluation of the risk/benefit of all activities made possible by the very existence of society. In this sense it is clear that the majority of the members of this society are now suffering because this society did very poorly at looking after itself in the last few years - by allowing the financial sector more freedom than it would have been wise. This attitude is identical to allowing our hypothetical chemical plant to dump poison in your reservoir. The deaths just happen in a more indirect way.
With all that in mind, it makes a lot of sense to ask if some kind of stock trading generates enough value that society should risk allowing it. I hope more people start asking that question.
Re:Profits, but for whom? (Score:3, Insightful)
You are laboring under the mistaken assumption that the elected officials are the sole cause of this mess. Give some credit to the executives who happily run the entire economy into the ground while reaping big bonuses.
Re:Profits, but for whom? (Score:3, Insightful)
It seems like a basic argument behind deregulation and a free market is that the free market makes the best use of people's self interest to benefit the common good.
When self interest starts harming the common good, it undermines the argument for a free market. As the harm done by self interest increases, it starts to support the idea that the public (our government) should step in to prevent an action that harms the common good.
A farmer selling food to a store, which sells to consumers is in the common good, and the individual self interest of everyone involved. A man breaking into houses late at night and stealing valuables is acting strongly in his own self interest, and not in the common good. These are black and white examples, but the GPs question is far from trivial, and far from black and white.
But, I think you missed the point... Not all actions have to benefit the common good. But, we should start asking questions when those actions harmed the common good. I have a hard time believing that millisecond trading added much value to the market. I doubt it created many jobs.
That 21 billion had to come from somewhere.