Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders
bloomberg.com
bloomberg.com
This is marketing spiel.
If you just want to trade on a bunch of exchanges so no information flows between them, you can easily (TM) write a program that either a) lines up the orders at each exchange to execute at a specific time or b) delays the orders from a central server by the line delay.
So say NYC is 13ms from Chicago. You want to hit both at once. As long as you're not 13 ms late, nobody can see your order in one place and react at the other. You don't need an atomic clock for that, NTP will do just fine.
They're doing this because they have a reputation as a technologically advanced firm, and they know it will impress institutional investors, most of whom are still living in a time warp where spreadsheets are an advanced means of getting an edge over the market. They meet these guys, who are basically from another dimension of investing, and they suddenly need an explanation to their bosses of why RT can generate the most impressive returns of any strategy ever. The answer is "we have loads of PhD math geniuses building the strategies and amazing execution technology".
Say you send out $100mil orders broken down into 100 $1mil orders, they are going to take some time to execute completely.
Won't the HFT's detect them long before they are executed completely ?
What's described in the doc seems to be an algo for snapping up everything that's available across the various markets at one instant in time (rarely that much).
If you try to grab $100M when there isn't that much around, you'll have to wait until someone puts in more orders so you can trade with them. Any market maker (including human ones) will not let you trade again at the same price if someone's just taken out the whole market, so your next tranche will be executed at a worse price.
Dripping the orders into the market is very common, but of course you leak the information by doing it. For the HFT however it isn't as obvious as seeing that an order must trigger an order on another venue (NBBO requirements) and just rushing to pull your orders from there or trading ahead of that order.
The point of this system is to send N orders to N exchanges in a simultaneous enough way that an HFT trader can't spot an order executing on exchange A and then issue their own order against exchange B.
the answer is 'we have loads of PhD math geniuses building the strategies and amazing execution technology'
that the institutional DD team is saying this to the investment committee or there is actually another entirely different reason?
So they'll come in with a list of checkboxes, which as a fund manager you learn to tick. Even if the questions have no bearing on how you're actually making money. So you might get asked what qualifications people have (very few people actually have a qualification in building strategies), or you'll get asked something quite superficial about what technology you're using (what's it written in? C or C#? Those are the same, right? That's good...)
Unfortunately, most of the DD teams I've seen do not ask the questions they need to ask. They have a long list of irrelevant questions that make sense to people who are in the CYA (cover your ass) business, not investing or coding. I never met anyone who asked me whether we used version control, and only a small sample bothered to ask whether we had our own money in the fund (one smart guy avoided a 50% blowup by doing this and discovering the big boss had barely any skin in the fund).
It'd be an interesting short white paper/post to see what a technical take on DD would be in a fund of funds/institutional investing scenario. I guess that would take away some of the value of the rise in the "consultants" we're getting calls from every day.
As obvious as the idea seems in hindsight, no one on the sell-side has a product like this right now. The closest thing is the Thor router, which is a crude attempt to accomplish the same feat because it doesn't address variation in latency. An algorithmic execution product like this would effectively end latency arbitrage, which is a source of RenTech's livelihood. To hedge against that, they have secured the IP rights to the technology.
On the other hand, this is a clear case of using the patent system to secure and persist an inefficiency in the market. It's hard to measure the cost of such an inefficiency to institutional investors (mutual funds, pensions, endowments, etc) but I suspect that it is well into the billions annually.
But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along with instructions on the precise times they should be executed. The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it.
A crucial part of the system is the optical, atomic or GPS clocks that will be used synchronize those orders. Renaissance says in its application that GPS clocks are accurate to within nanoseconds and any time differences between them are “too small to be perceived” by HFT firms.
Maybe I'm missing something but sending orders ahead and releasing at a specific time is obvious is it not? If you add a really accurate clock suddenly it's patentable?
With software, it really depends on how deterministic your packet handling and timestamping routines are (or how deterministic the OS scheduler is). I was able to achieve accuracies of less than a microsecond on a Linux system, but it was "touchy".
For reference, there's an open source implementation called "ptpd" and "ptpd2".
Particularly if you're using it to sync between two different time zones that could well be looking at different satellites.
However, I don't know how much inaccuracy is introduced and whether it would have too much of an effect for the purposes of Google, et al.
http://www.nytimes.com/2000/06/15/technology/pentagon-lets-c...
The errors you see in your mobile phone's positioning are due to signal problems (reflections, etc) and the relatively limited capabilities of the cheap GPS radio in your phone. A decent GPS receiver with a well-positioned antenna will get a highly accurate clock.
Speed of light is 299,792,458 m/s. So if GPS is off by more than 1/10,000,000 you can't get accurate within 30 meters. Having used a GPS they are better than that, thus the clock must also be at least that accurate. Of note, stationary stations can get into centimeter precision which imply's vastly higher accuracy.
PTP is mainly useful for situations where you want to synchronize many cheaper slave devices to a common master and it's not practical for each device to have its own GPS receiver, or for situations where the use of GPS isn't practical (or is prohibited) and you're more concerned about coherency between devices rather than traceability to a primary time reference (e.g. a telemetry network on an aircraft). Although, generally, the grand master of a PTP network is synchronized to GPS anyway.
Of course, you could achieve actual phase locked synchronization down to the clock cycle with something like SyncE + PTP, but with GPS, you need not worry about issues with asymmetry regarding messages transmitted over the internet (PTP needs to be routed through PTP capable switches which compensate for the residence time and was really meant for LANs).
I guess it really depends on your constraints, but if you’re able to use GPS, that would definitely be my first pick when it comes to synchronizing multiple devices.
The latest UBlox timing receiver (LEA-M8F) provides a PPS which is accurate to less than 20 nanoseconds (to the UTC second) and its built in oscillator has a typical holdover spec of 0.025 PPM (25 nanoseconds per second). If you want to get fancy, you can use the PPS to discipline an OCXO and get an even better holdover spec to handle the situations where your receiver may lose lock (which is unlikely if you’re able to have an antenna).
Basically, the accuracy of the UBlox GPS receivers (just an example since they're pretty cheap; I found a board for ~$150), is equal to or better than that of a usual PTP link (without SyncE), so you might as well just use GPS on each device if you can. It is simpler, IMO.
However, note that comparing GPS to PTP isn't necessarily valid since PTP is purely a method of conveying timing information between devices, and is not a time source itself, where as GPS is both a method of conveying timing information as well as a time source. In other words, a PTP network still needs a master device which itself is synchronized to (or is) an atomic clock.
Source: I work in finance as a techie.
"London-based trading technology company Fixnetix said Tuesday it has the world’s fastest trading application, a microchip that prepares a trade in 740 billionths of a second, or nanoseconds." (WSJ, 2011)
http://blogs.wsj.com/marketbeat/2011/06/14/wall-streets-need...
http://stackoverflow.com/questions/17256040/how-fast-is-stat...
That said, the Fixnetix stuff is only talking about one aspect of what's involved, and about as representative of reality as Cisco's published WARP speed figures in their Nexus 3500 range.
The hft'ers can't make money since they can't outrun trade offers that are synchronous across all markets.
That said, it wouldn't alleviate the issue necessarily. If firms detect problems in the clock sync between exchanges you are right back to the same problem, and now you've added a complex bit of tech that requires a bunch of competitors to agree on.
This seems, to me at least, to be one of those problems that it is better to let the problem surface than to try to alleviate with an abstraction layer that is leaky and error prone.
HF traders give the exchanges a nice cut (colocation costs, etc). Not many corps can afford it.
Arguably, it is more fair now than it ever was in legacy "open outcry" markets where the size of the floor was fixed and if you didn't get a spot on it you weren't able to compete.
Disclaimer: I've worked in HFT 9ish years (10 soon)
Not all businesses can afford this, but it is only 4 or 5x the price of a normal GPS timesource, which is affordable for the right people.
That sort of sounds like DDOS to me. They patented a DDOS botnet.
If the market accepted the time of execution from traders and kept the trades secret until they were executed, then there would be no need for these patents.
So, in that sense, "a method of coordinating orders across exchanges to minimize analysis time available to other traders" seems perfectly in line.
(I agree that from various computing-centric backgrounds, this might be trivial, but not all problem domains are well-saturated with computing expertise, and this might well be sufficiently novel to warrant a patent in the domain.)
If you're hitting multiple exchanges, then you can take milliseconds and still be fine.
Many firms invest heavily in direct microwave links for paths normally served by fiber because of the speed advantage.
[edit] Completely wrong comment. The microwave link I was thinking of had a 2 milli advantage over the fiber link.
This Wikipedia article [1] shows the standard Chicago to NJ connection at 14.5ms roundtrip and the dark fiber line Michael Lewis talks about in Flash Boys at 13ms.
Also, GPS clocks are cheap and precise, atomic clocks seem gold plating. (Which sometimes is actually necessary in electronics, BTW...)
At Google, we use both GPS and atomic clocks for Spanner.
And, boy, do the off-the-shelf commercial offerings suck. The vendors are not really used to dealing with the stress that Google puts these things under.
But, their drivers and APIs seem woeful judging by the complaints I heard.
This was the first thing I thought of when hearing the flash boys story on the radio: The banker was complaining he couldn't capture the whole book across exchanges because resting orders were cancelled before his order got there -- he just needs to get his orders to arrive close enough in time (although expect a bigger tick, probably)
(See https://www.goodreads.com/book/show/23570025-flash-boys)
I've evolved to keep this rule in mind when I hear almost any story/portrayal/claim/news anymore. Especially anything that feels sensational or too-good-to-be-true-at-first.
For example, people often lie about sex or money. National governments often lie about, well, pretty much anything that suits their best interests. When I say "lie" I don't mean completely wrong or totally false, merely, spun a certain way, sometimes a careful omission of critical modifiers, the use of weasel words, etc.
Hedge Funds don't patent strategies. They keep them as trade secrets. It would make more sense to me if this filing was part of an attempt to build a patent portfolio for defensive purposes, as tech companies do.
Google: "“We can commit data at two different locations — say the West Coast [of the United States] and Europe — and still have some agreed upon ordering between them,” Fikes says, “So, if the West Coast write happens first and then the one in Europe happens, the whole system knows that — and there’s no possibility of them being viewed in a different order.”"
Renaissance Technology: "Replete with schematic drawings, the filing describes a novel way for “executing synchronized trades in multiple exchanges.” The invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks -- precisely calibrated to vibrations of irradiated cesium atoms -- to sync orders to within a few billionths of a second."
To translate what Renaissance is doing in technical parallel, they are trying to do a synchronous commit at multiple locations/exchanges at the same time. Submitting a trade to an exchange can be viewed similarly to committing data to a data center. By using atomic clock, synchronize these writes across multiple locations in effect eliminating HFT from jumping in.
If anyone is looking into prior art on this, Spanner is probably the closest I can think of. (I am not a patent attorney and don't want to turn this into a patent debate).
[1] http://www.theverge.com/2012/11/26/3692392/google-spanner-at...
http://research.microsoft.com/en-us/um/people/lamport/pubs/t...
Not to argue with you, but I don't see the problem any different from trying to synchronize two commits in a database. The same technique is not limited to Spanner or algorithmic trading, but other fields as well. It's not so much different from DHT or other algorithms, which have applications in multiple domains.
You could argue ships and automobiles are in the same transportation-domain ?
For instance, at the VLBA: https://en.wikipedia.org/wiki/Very_Long_Baseline_Array
Funnily, that works only if the two observers are in rest relative to each other, as relativity theory tells us. :-)
These issue crop up on integrated circuits where clock cycles are shrinking and die sizes are increasing. Defining simultaneity where the microinstruction cycle time is much shorter than the chip or board propagation time is tricky. Each design has their methods to deal with this.
I wonder if what they're really trying to do is prevent banks or others from creating anti-HFT infrastructure, and then providing it as a service to market participants that want to place large orders. The patent would perhaps provide some protection in that case.
Those types of hft firms are surely eating into Renaissance's profits in a big way.
If a firm is able to consistently get to all the other exchanges first, they can shave pennies off of a large percent of orders. That's a pretty big downside for everyone that trades.
They get accurate prices to the market faster, but only by a millisecond or so. That's a miniscule upside.
How is the bad not a thousand times the good?
Except for those who have their pensions stored in Renaissance's own pension fund, hah!
(And places like Germany only recently tightened laws against it.)
1) speeds up price discovery 2) makes complying with regulation cheaper 3) it is nearly impossible to enforce currently
Some op-ed pieces arguing for it.
http://www.marketwatch.com/story/why-insider-trading-should-...
http://www.forbes.com/sites/jeffreydorfman/2015/03/22/a-mode...
https://www.washingtonpost.com/news/wonk/wp/2013/07/26/insid...
I am on the fence myself, not having thought about the matter too much. Instinctively, I'd say insider trading should be handled as a breach of contract (ie if I trade on something that I signed an NDA for), not as a criminal matter.
Admittedly I have zero special knowledge of Renaissance and what particular strategies they use.
Renaissance is using satellites to monitor retail store foot traffic to predict quarterly earnings.
(both as hypothetical examples)
But I'm no longer willing to fight the front-running term fight anymore. It will just have to be like my fight against the mainstream use of hacker.
Just like people will call things "insider trading" when there is trading based on insider information, whether or not it happened to be legal.
The reason front running is illegal is because it is a violation of a fiduciary duty. Third parties do not have a fiduciary duty, therefore it's not illegal. "It's front running, but without the violation of the fiduciary duty" is like "murder, but without the killing someone", or "fraud, but without the deception".
> What would you rather have them call it? They can't call it nothing.
Not everything needs a name. Since what you seem to be describing is "reacting to the public actions of other market participants", does it need a name?
Alternatively, if you think something serious is going on, why don't you define it, and then we can name it?
And nobody is calling this kind of "front running" illegal.
> like "murder, but without the killing someone", or "fraud, but without the deception".
In a murder analogy, you'd keep the killing but change something else, maybe it's properly manslaughter but people will still call you a murderer.
For "fraud without deception", let's look at what that entails. You lie. The victim knows you're lying, no deception involved, but they rely on your word. The victim is harmed. I think that's close enough to allow people to call it fraud, even if legally it's slightly different.
> "reacting to the public actions of other market participants"
The reason people dislike it is because it's not just 'reacting'. They're getting in their own action before the thing they're reacting to has finished.
> why don't you define it
Darawk defined this version for us. "front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives."
Seeing a completed order on exchange A, and speculatively purchasing stock on B in the hopes that the buyer might later buy stock on B sure sound reactive to me.
(And it's not might when there are rules about doing things on multiple exchanges. But I'm not an expert on that part.)
So your argument is...what?
Hypothetically: Let's say I have an inventory of stock A, which I think is worth X, and which try and sell whenever the market price climbs above X. Now there's some new public knowledge that materially impacts my estimation of the value of that stock (eg, a large hedge fund has started buying large blocks of this stock): I no longer think it's worth X, but actually Y, and I'd like to stop selling it whenever the price climbs above X, and instead wait until the price climbs above Y.
So you're saying that's okay, and I can price my inventory however I want, but only if I give the hedge fund a chance to buy a bunch of underpriced stock first? This raises some questions such as:
1) Why on earth is that a good rule?
2) How much time do I need to give the hedge fund? Do they only need a few seconds? Should they get a day? A week? At what point am I allowed to change the price I'm selling stock A for without it "interrupting" the hedge fund? Do they need to announce that they're done, or is their a timeout period after which I can just assume? Can I change the price I charge other people if I still let the hedge fund buy at the old price, or does everyone get the discount?
3) Or is it not about time, but about amount? Does the hedge fund have some divine right to buy as much stock as they want without it driving the price up? Why? And how come nobody else has that right? Do you have to be a hedge fund to get the right to name your own price, or do normal people get to do that too?
4) Or is it somehow okay if I'm selling, but not buying? Is it's okay for me to raise the price I'm willing to sell stock A for if I find out a hedge fund is investing, but not okay for me to raise the price I'm willing to buy stock A for? What happens if I find out a hedge fund is liquidating their position instead? Do I get to lower the price I'm willing to buy and sell it for, or just one of them? There's no laws or SEC regs about this; is there a list of rules somewhere? Is it in the bible?
5) Does this only count market actions? If the hedge fund gives a Bill Ackman style press release about how some company is terrible and should be prosecuted, can I change my prices immediately, or do I need to wait in case I'm interrupting some hedge fund strategy? I mean, maybe they were planning on giving the press conference and then buying a bunch of stock; if I think their arguments are bollocks and I buy a bunch first, is that interrupting them?
And so on. The entire argument seem awfully focused on why large hedge funds and investment banks should be able to ignore basic market rules. I'm sure they'd like to; I'm still waiting to hear why they should. (One of my favourite scenes for Lewis's Flash Boys was when a trader expresses outrage that his very large order in a thinly traded stock caused the price to move against him. How terrible; if only there was a law that required people to trade with him at the price he chose...)
Can you not see how it's bad in the specific case where they already issued the order to all exchanges but your order gets processed first because you used a different cable? Ignore the more ambiguous cases for the moment.
Why is protecting the interests of hedge funds and investment banks important enough it needs a special rule? This isn't a rule that will benefit the little guy; it strictly benefits the biggest fish.
> Can you not see how it's bad in the specific case where they already issued the order to all exchanges but your order gets processed first because you used a different cable?
To be clear, your concern is strictly that if a hedge fund is buying a very large amount of stock, this will cause the price to move against them as people react to it, and you think they should get a full half second (an eternity at the speed of the modern market) to buy as much as they want before people are legally allowed to react?
That sounds like a terrible idea, and in the specific case you list: No, I don't see why that's bad. I don't see why anyone except a large hedge fund or investment bank would.
Further: Once the order hits the market, you're saying there should be a half second window during which no one can do anything except the hedge fund. But as soon as that half second window closes, there will be a race to (finally) react. Which will be won by...the HFT firms, right? Won't they be able to, hypothetically, get their rSo even if we accept your premise, isn't this just shifting the victims around without fixing anything?
> To be clear, your concern is strictly that if a hedge fund is buying a very large amount of stock, this will cause the price to move against them as people react to it,
> in the specific case you list: No, I don't see why that's bad.
The original scenario has nothing to do with order size. The scenario is that X sends a simultaneous order to multiple exchanges, but while it's still in transit to most of the exchanges Y reacts to the order and submits their own on a faster cable, getting there before the order they're reacting to. I think such an outcome is clearly bad. I won't suggest a fix to avoid distraction. Do you disagree with it being bad? Picture it happening to an old lady if you have no sympathy for hedge funds.
In equities markets, for trades of a sufficient size it's not possible to place the order all at once. You'll hammer the order book, and take very suboptimal pricing for the latest marginal shares you buy/sell. Therefore you have to split up the order into chunks.
HFT firms will try to detect when equities traders are doing this. e.g. If they see a pattern indicating that chunks of shares are being bought, they will try to buy, too. When the rest of the order comes through, the price will rise and that firm will make money. That's why "front-running" is just a special-case of an algorithm to predict price movements.
I seriously doubt that a HFT fund as large as Rennaissance uses a single strategy, be it satellite images, or front-running or what-have-you.
I think dsl is quite familiar with the sort of HFT strategy you describe. I think s/he is just trying to correct your use of the term front-running, which was redefined by Michael Lewis et al. from its previous definition as the objectively illegal activity by a broker-dealer. Based on comments like yours, it's a losing battle.
Price discrimination against large traders - grandma gets a better price than Bill Ackman - is a valid and real HFT strategy. They do it in the manner you describe.
But it's not front running. It's only front running when your agent (usually your broker) does it based on private information.
Front running is just a term Michael Lewis misused in his misleading advertisement for IEX.
It's impossible because the HFT will only know your order has reached exchange A after exchange A has told him about it. Obviously A can't tell him about it until after your order has arrived.
Front running is a strategy where your broker sees your order, trades ahead of it, and then routes your order to the market. It's highly illegal.
"Buying ahead of you" requires some kind of advance knowledge, and in the scenario described you simply don't have it.
I don't really know if that is the case (or ever was).
In any event, it's not acausal.
Suppose there is a pattern of 10% of traders being sloppy, and 90% being not sloppy. If you run this strategy, you lose 90% of the time.
Additionally, whenever a small trader comes along, you are again overreacting. I.e., I make quite a few (automated) trades. I never cross exchanges or blow up more than 1 level. Whenever I trade you are again buying all the shares and probably losing money.
What I described as acausal is responding to an order at BATS before it gets there. Guessing that maybe an order might go to BATS because you saw one at ARCA isn't acausal.
Example:
Vanguard sends a buy order of 1000 shares of AAPL to exchange A. Some HFT firm sees that order on exchange A and knows that it will also be placed on exchange B, and was surely broadcast from Vanguard's trading floor at the exact same moment as the order to exchange A.
However, the HFT firm also knows that Vanguard is physically closer to exchange A then B, and the HFT firm has invested a lot of money to ensure that they have the physically shortest possible route from themselves to exchange B.
This allows them to broadcast their order to exchange B and have it arrive there before the order broadcast by Vanguard, even though they broadcast their order later.
It is somewhat difficult to wrap your head around, but it is a physical reality, and people are making millions of dollars from it as I write this.
B) he is reacting specifically to the term front-running which has a known technical definition in trading and cannot happen the way you describe (I've said elsewhere I believe the term has been appropriated and redefined and am not willing to fight that anymore, maybe he is).
C) it's funny that you mention Vanguard as they have been pretty adamant that HFT market makers of the form that use latency are save them money.
TRADE AAPL 1000@$96.98.
He does not see "Vanguard" - the trade confirmation is anonymous. It could even be him! (Yes, you are subscribed to a multicast trade confirmation feed and even your own trade confirmations are anonymized.) He does not see Vanguard's physical location - for all he knows Vanguard is closer than he is.
So actually, all the HFT knows is that someone bought some AAPL.
Now what? Whenever someone buys AAPL he goes out and buys a bunch more? That doesn't sound like a moneymaking strategy to me.
What evidence do you have that people are making millions of dollars from this as you write this? Michael Lewis?
Especially since for every seller there's also a buyer.
What you are describing isn't front running (or even illegal).
It certainly seems to me that they are running out in front of the order. I'm not sure how exactly you might be contorting the meaning of 'front running' for this not to apply.
But it is a lost battle anyway.
You're discussing trading in response to an executed order, which you have as a member of the general public.
If that's front running, then what isn't? Is my purchasing wheat futures in response to news of an predicted drought "front running" the orders that bakeries will be making?
You've entered no such agreement with other market participants.
The behaviour your discussing does not involve any fiduciary responsibilities.
> This behavior, however, is identical to it in spirit and moral character.
That seems self-evidently false, but okay, I'll bite: What moral precept is being violated here, and why is it "identical" to the fairly serious sin of someone with a fiduciary responsibility to you violating your trust?
Let's play fill in the blanks: "Goldman Sachs wants to buy $400m stock in Apple, but after they buy $20m, a member of the public sees the strange pattern of executed orders, guesses that someone is buying a lot of Apple stock, and starts buying up stock too. This is highly immoral, because members of the public have a ______ duty to ______, and not allowing Goldman Sachs to manipulate the market in peace violates it."
What phrases can we put in the blanks that makes that not nonsense? I'm pretty sure it's not a fiduciary duty, and it seems quite clear it's not to Goldman. What duty is it, and to whom is it owed?
When an investor decides to put their money in a fund, are they going to choose the one that has a patented defense against HFT or will that investor put their money into a fund that has a known vulnerability?
>It's fairly general: send orders ahead to co-located servers to be executed at specific times.
This is harder than it sounds. Coordinating a number of servers in different locations to send a trade at a specific time is not that straightforward when you're dealing with microsecond or nanosecond transactions.
Forget the trade, just trying to synchronize the time on all of the different servers in different locations is a large challenge. NTP has an accuracy of 10ms on the open internet [1]. The state of art in HFT is sub-microseconds [2]. This is at least 2 orders of magnitude faster than the NTP margin of error.
[1] https://en.wikipedia.org/wiki/Network_Time_Protocol
[2] http://stackoverflow.com/questions/17256040/how-fast-is-stat...
With GPS receivers or very good network connectivity to your ntp server (ie. not home dsl) you can easily get down to below 1ms.
I thought RenTech didn't have investors anymore.
"On a local area network, [PTP] achieves clock accuracy in the sub-microsecond range"
https://en.wikipedia.org/wiki/Precision_Time_Protocol
I disagree that the problem the patent purports to solve is particularly difficult, given the technology that is already readily available (PTP, an OS with a high resolution clock, machines located in exchange data centers).
Jeezus. That is about the same OOM as Moore's Law.
for comparison, according to one source, over 50 years, Berkshire Hathaway grew at about 21 - 22%
Quick math (which is wrong since they've changed their fee structure) -- If you had invested $1M with Renaissance in 1994, using a 5/44, you'd end up with something like $411M in 2014. Ren. would've made about $430M.
https://www.chrisstucchio.com/blog/2012/hft_apology.html
https://www.chrisstucchio.com/blog/2012/hft_apology2.html
https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...
A basic summary is that market-makers add liquidity to the market and profit from their bid-ask spread, increasing the execution-speed and depth of the market. Many of the 'predatory' pricing strategies attributed to them by Lewis and others appear to be impossible when you try and write down the pseudo-code + order book that corresponds to the allegation.
This assumes you're willing to trust their software and hardware.
I suspect they're right that this is a far more effective and comprehensive approach than IEX.
I think IEX is going to nail them to the wall because their target market understands and trusts a giant ball of cables having a particular length, but can achieve neither when faced with a giant ball of computer science.
Other than the first sentence, this comment was about potential customer response; I don't have an educated opinion about how trustworthy and/or effective any given exchange software is.
The goal is to be able to execute buys across multiple exchanges (because the orders are so large) without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange.
This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders.
HFT firms can have orders that have been resting for a very long time (days/weeks depending on the exchanges/risk rules) and you will never be able to get an order now in front of an order from last week, no matter how fast you are.
See big sell order at getting executed at $10.30, $10.20, $10.10 at Exchange A. Short sell at $10.30 on Exchange B. When the big order comes, rebuy at $10.20.
Right. One of the strategies is:
- Put in standing order to sell a small amount of security slightly below market and leave it active.
- Wait until a buy order triggers it.
- Buy same security faster than rest of buy order can be processed.
- Sell security just bought at higher price.
- Profit.
There are lots of variations on this, but that's the basic idea. It has the profitability of front-running, but is legal.
How? You can't because your competition is already resting orders there (from potentially weeks ago) and any order you put in there will be behind your competitors no matter how fast you are.
What does happen is that you all are resting orders up and down the order book. When a big order takes out several levels of your orders, you race as fast as possible to cancel those same levels at other exchanges. If you are faster than the big order you only get hit for a single exchange.
Its a risk mitigation technique, to keep your profits from your regular business of making the spread, not risk free profit.
So one place firms are racing is on the cancel side. The other is on filling back in orders after the big order has cleared levels. The faster you are there the better priority your resting orders will have (potentially weeks from now).
Consider the alternative way this "strategy" can go:
- Put in a standing order to sell a small amount slightly below market.
- Wait until you receive a "TRADE CONFIRMATION 100@$10" message.
- Buy a lot of same security very fast and put in a sell order at higher price.
- No one actually buys it.
- Loss
This is actually a very risky strategy and very few people do it.
What's actually happening most of the time is a far less risky one:
- Put in standing order SELL 100@$10, 100@$10.05, 100@$10.10
- When you receive TRADE CONFIRMAtiON @ $10, cancel other orders and reprice higher (maybe $10.20 and $10.30).
- Maybe put prices back if you don't get filled in an hour.
The goal here is to offer a good price $10.00 to Joe Sixpack (no delta toxicity), but to offer a worse price to Bill Ackman (high delta toxicity).
I used to work with Peter Kovac, that book's author, at Madison Tyler Technology / EWT LLC (which is now Virtu Financial). He's one of the smartest guys I've ever met and that was a pretty decent book.
I have seen odd priority rules around how orders get around sweep or self match protections and the like, but not jumping a resting, visible order.
Given the order type doco is public for SEC regulated exchanges I doubt your IP agreement restricts you from slipping me a link right? ;)
If I put a vanilla limit at a level and don't cancel it (and its GTC) today, I've never seen an order type that would allow someone to jump me in the priority queue tomorrow.
Think of it this way:
- In the past (prior to HFT), when you put in an order, you know where the market is going to be. How you win is by building better financial models to identify which security to buy/sell.
- With HFT, traders, without sophisticated tools, can no longer trust the market because once they submit, HFT algorithms can shift the market. The focus now is to build a better HFT product to win in the marketplace.
- What Renaissance is doing here is neutralizing the effect of the HFT on their trades. Once they neutralize the "enemy", they can go back to doing what they are great at: financial modeling.
Throughout history, power has shifted with changes in weapon technology. This is just a shift of power back to traditional fund managers from HFTs.
All that was ever available was information about past trades, and perhaps open orders in the market that could have already been removed at any time?
When I said "where the market is going to be" I meant that from one second to the next, you knew it wouldn't move that far.
In the past, when you called up your broker to buy a stock, he could give you a quote (say 12.35) and you tell him to buy, you know that the price will be the quoted amount. (Market in finance lingo in this case means current price of the stock)
If you need to sell a large batch of stock, you know the broker can sell it to multiple people and get you the best price.
With HFT, trades are moving so much faster and you can get a quote from the exchange (someone want to buy 500 shares @ 12.35) and by the time your trade gets sent from your computer to the exchange, that offer is now 400 shares at $12.50. The market has moved in milliseconds. In other words, you cannot trust the market (current price) because you don't know where it will be in the milliseconds from viewing the quote to entering the trade.
In Flash Boys, they talked about ghosts in the machines. This is what they were referring to. When they entered their trades, it's as if the market knew beforehand and moved against you.
(For finance savvy people, apologies, I've simplified it in lieu of understanding)
You can still get that pricing level almost everywhere by quoting through the market at that price difference.
Despite the hilarity of such a thing, is this a sign that HFT is not nearly as profitable as it once was?
That said I have no idea why they would patent this. I can't see how they can make money from it.
("One minute" is a guess. Could be right interval is 20 seconds or ten minutes or whatever... But needs to be slow enough to allow full dissemination and reasonable time for sealed bids.)
You'll probably be interested in reading Eric Budish.
Tie breaks can be fair split with cryptographically random split for the last share, for example.
Yes, "all or nothing" would complicate, of it's still a necessity, but all those things are solvable, if we believe in fairness of markets and avoiding the next flash crash.
Having windowed auctions is also common. They are still latency sensitive as the entry/exit information is still subject to races.
Budesh has a good paper outlining batch auctions and their advantages but it still doesn't account for the fact that cross exchange arb is still an issue.
Why? We don't need a minimum wage for market makers.
As far as your suggestion, that's what I was thinking for a while when I first read about them. I don't think it works. Simply cutting over every minute doesn't help, since there'd be a race near the edge. Like eBay, there's zero point in submitting a bid until the very last (milli|micro|nano)second.
It also doesn't work because other exchanges exist. For instance, suppose the interval is an hour. You submit at 0:01, then by 0:30 the price has moved on other exchanges. Obviously you'll want to change your order, and you still have time. But the price is changing on other marketplaces every nanosecond, so you're going to be changing your bids right up until 0:59.999999. Once you allow changing the order, you're back to racing.
If this was the only exchange type, and they all were synchronized, it might work a bit better. But you'd run into another issue: no one would submit an order until the very last microsecond, to use all available information. There's probably more complications too; I don't really know anything about this stuff.
HFT isn't a bad thing, or at least, I've not heard why it's actually bad. Other than runaway programs screwing things up. Which, I think is actually great. That big flash crash was fucking hilarious. People had sell orders in at 0.01 or market or whatever, and they executed, then they got all upset that things worked like they should!
I've read some interesting proposal that removing the subpenny rule would make speed less of a concern, since it would be possible to undercut on price instead.
See https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...
http://www.npl.co.uk/commercial-services/products-and-servic...
Case in point: gang switch in the era of voice brokers. Nothing says 'synchronized' execution better which is all this application is.
I should have been more clear, computer based autonomous or semi-autonomous algorithms should not be allowed to trade.
A way to discourage this is by adding a very small fee to each trade. This eats/takes away their profits.
The problem is their are too many folks making money that are connected to the right people in Government.There will always be talk about doing something about it but nothing will ever happen.
The only positive outcome from all this is that it created an arms race in the industry when it comes to the technologies used to facilitate HFT or fight it.
Now whether that technology trickles down to the rest of us through new and interesting things remains to be seen.
As another person commented elsewhere, front running is a specific term with a clear definition and is illegal. HFT firms do not do front running.
Just like to add Google HFT Firms Front Running and let me know if that is enough info to convince you.
The first result is an article explaining how HFT can't front run [1].
How about instead of making vague arguments about how HFT does front running, provide a specific example of how HFT actually does front running as you claim.
And no, one anecdote is not enough. You have to prove that there is a systemic fault in the way the HFT trades in the market that allow them to operate illegally at scale without any repercussions. To find one HFT firm guilty of front running and then claim that they all do would be tantamount to saying all hedge fund managers cook their books just because Bernie Madoff did. I'm sure you can see the absurdity of that accusation.
[0] https://www.google.com/webhp?sourceid=chrome-instant&ion=1&e...
[1] http://www.cnbc.com/2014/04/03/high-frequency-traders-cant-f...
HFT firms don't have customers generally. So they can't front-run even if they wanted to. They'd have to make a deal with someone that does have customers. That's a pretty big conspiracy theory. And it isn't needed because HFT can make money just by seeing what orders hit the exchanges; no need to know about the orders before that.
Perhaps even allow orders at arbitrary random numbers? (More precise numbers take more time to transmit anyway.)
The tone of the conversation, the framing assumptions, seem different now.
And yes, it's different, because when HN was new its comments were a lot more precise and fact-based, now it's full of dogmatic luddites.
[1] https://www.amazon.ca/Flash-Boys-Michael-Lewis/dp/0393244660
[1] https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...
The Flash Boys book is so obviously incorrect. Lewis writes stuff that, if taken seriously, would imply things like major traders not understanding basic price impact. Or major traders having trojans placed on their computers. One anecdote he mentions is something like "I entered an order but didn't press execute. The price changed!" ... As if there's some sort of conspiracy.
Lewis's main point seems to be that it's no fair you can't sell a million shares of something without moving the price.
It is disheartening to see someone get things so wrong, have glaring inconsistencies, and yet get wide acclaim. Just another instance of Gell-Mann amnesia effect. Probably many popular books are just flat-out wrong and we collectively just go on thinking incorrectly.