High-Speed Trading: Lines, Radios, and Cables
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Edit: reading through some of his more recent updates I think he's still on the money
Do FPGA engineers at trading firms get paid the same as quants or are they like sysadmins?
Finance firms have increasingly had to compete with tech firms for tech talent and many have moved to offer similar benefits.
Some do this because they believe it's inherently healthy, others because they feel they have to compete and it's a purely utilitarian matter. Others just offer more money instead. Interestingly, it's not always that much more in the long run.
Need neutrino comms, straight through the earth.
Why would they rate limit them? Better yet: why do you think it’s better for the market that everyone is put on even footing?
> Because I have better execution time I get to profit?
Yes. Just like better information allows you to profit. Advantages exist in the world. Do you think better execution is trivial to develop?
> I don't see how that adds any value to anything...
HFT is fundamentally the same process as market making, but faster. Market making brings buyers and sellers together to exchange securities; doing this process faster improves liquidity, which in turn improves price discovery, which makes the market more efficient overall.
Just because you cannot see the value doesn’t mean it’s not there.
Almost all markets now prioritize on price. An incoming sell order will interact with the highest priced bids first, and an incoming buy order will interact with the lowest priced offers first. Think that's common sense? In the pit days, markets were sometimes prioritized based on whether the guy was your cousin or if your dads were fishing buddies. Better price? Oops, didn't see you, pal.
But say 15 traders all want to buy at the best price. Who gets filled when a seller comes in with a market order? You could:
1. Prioritize equally: Give everyone bidding an equal piece. Fair's fair.
2. Prioritize by size: Bid more contracts at the price and get a bigger piece. You wanted it more than anyone else.
3. Prioritize by time: First to bid at the price gets filled first, then second, and so on.
Over years many ideas have been tried and nearly all markets worldwide have settled on 3 or some variant of it, why? Batching orders together as in 1 encourages people to split their interest into many small orders. It also discourages traders from sticking their neck out to make the best price first. Why bid alone when you can wait for others to bid with you? Likewise with 2, traders will try to game the system by placing very large orders and are rarely willing to improve prices.
So we end up with 3 which causes some speed jockeying in return for forcing traders to bid their true values right away to undercut on price, to everyone else's benefit. In return, they get rewarded with trading first.
Furthermore when I place a limit order close to the market I almost always see the price move away immediately, and I can't help wonder if somehow it's being manipulated to try to get me to chase it. If I log off and wait, it frequently gets executed after a few minutes.
I was chagrined to find that a limit order I placed yesterday was partially executed. Of course I should have made it "all-or-none".
People say the market keeps getting more efficient due to high speed trading, but to me there's something lacking in the definition of efficiency. If "the market" isn't stable enough for a reasonable human reaction time, that's worse, not better.
My thoughts aren't well organized right now, but basically I feel like there's something about the ignorant raging that one reads about HFT that points to a real, but subtle problem.
Edit: Look at it this way: I don't have liquidity, unless I am willing to place a market order. But the market is a leaky abstraction - I'm potentially hanging myself out to dry with a market order. On the other hand, with a limit order, I do not have liquidity because other people trade faster than me. As I described, I tried to sell a certain amount and it ended up taking 15 minutes and only executing 1/5th. So an efficient, liquid market that is supposed to be _better_ seems _worse_ from my perspective.
The reason professionals might use a market order even knowing about flash crashes is that there are certain positions where not filling has virtually unlimited risk regardless of fill price. Hedging option positions for instance.
Also lots of liquidity in ETFs and other derivative products is provided based on being able to hedge quickly in other tickers with high probability. If I'm making a market in XLF (S&P Financials ETF), but my orders to hedge in BAC, GS, MS, C, ... all get held up in a batch auction, that's extra risk. I can't make a tight spread, large size market in the ETF since the price of the basket components can drift away after I get a fill.
Budish also argues that arbitrages aren't competed away. It's true that arbitrageurs will never eliminate arbitrages, only make them last for shorter periods of time. However, natural market participants can change their behavior to eliminate them, and they have.
If everyone trading S&P 500 futures also traded SPY with orders that arrived simultaneously, fewer arbitrages would exist to be exploited. You don't even need to be fast to do this, just precise with timing. This kind of routing is very common in equities markets and it's a big part of why many early HFT scalping models no longer work regardless of how fast you are.
The faster the market makers trade, the tighter the feedback loop from buy and sell signals in the orderbook becomes, and the smaller the spread between competing prices.
That's a great analogy to control systems.
Monkeys slapping black boxes on black boxes on top of each other is not sufficient.
That is, slapping black boxes together sometimes works despite the risks.