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Comment by snikolic | Hacker News Reader

What bothers me is how simple this is. This is simple arbitrage that anyone with access to wikipedia could figure out in a few days.

What makes these strategies profitable is exclusive access to information - not actual investing prowess. It's about who can afford to buy the fastest hardware on the fastest pipes in the closest proximity to the exchanges and top tier e-brokers. It's frequently even about who you know.

If your only competitive advantage is systemically restricting the public's access to information, you're doing it wrong.

(but my inner nerd thinks this is super cool, and my inner Gordon Gekko wants to get started today)

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There is a signficant cost to obtain data and most of the seemingly simple trades don't make much money anymore. Purchasing realtime market data is very expensive, and you generally need to make 1000$ per trading day to break even. It's not easy in this economic climate, especially if you are trading your own money.

Amongst other things, dark pools and alternative venues have sucked a lot of liquidity that would traditionally hit the market.

The reason the information is available on Wikipedia is because people like me contributed to many of the wiki articles on the topic :)

The profitable opportunities themselves are fleeting and tiny, which means only the first few traders actually get the trades they want. This, coupled with the sheer number of firms (in the hundreds) forces traders to do what it takes to minimize their delays, including obtaining lower latency market data, high performance servers and proximity. And yes, some exchanges (like NYSE) definitely play favorites.

What happens to the industry when market access and data is openly available at an affordable price and a speed/scale comparable to what professional traders currently have access to? And why hasn't this been done yet? As an outsider to the financial industry, it looks like this information/access is slowly becoming commoditized (IB, Lime, etc.)... is there going to be chaos when any HN reader can begin low latency trading (or mining market data) as easily as they could get started on a service like Twilio?

Why are so many exchanges still private? Why do you have to pay exorbitant amounts of money for an exchange seat or high-quality exchange access? Why do some exchanges have designated market makers? Are these systems actually effective, or is this just nepotism among bankers?

Disclaimer: I have no idea what I'm talking about; I'm legitimately curious about this stuff. Hope I'm not coming across as too brash/angry. :-)

All of your questions will be resolved if you understand one key fact: "Exchanges are companies". If you want to know why they are not government entities, imagine the GOP backlash if they tried to own and run an exchange (I'm not sure how democrats would respond, but republicans would definitely cry wolf). They are businesses, which is why:

- market access and data will not be openly available at a reasonable price (you have to spend extra money if you want to redistribute the data). Yes, this is a profit center for the exchanges

- Exchange seats will be limited and cost money (profit center)

- Colocation will always cost money (people are willing to pay to colocate)

As far as DMMs are concerned, there is a legal obligation to place orders and offer a buy and sell price. More specifically, they are required to be at the inside bid or offer (buying at the best buy or selling at the best sell price) most of the time. This ensures that there's a reasonable counterparty when some other trader wants to buy or sell. There is some economic incentive to be a DMM, but they provide a real service to the markets.

A few example exchange companies that list on public exchanges:

NDAQ: NASDAQ OMX Group lists

NYX: NYSE Euronext

CME: CME Group (Chicago Mercantile Exchange)

Regarding corporate exchanges: they may be private companies, but they are heavily regulated and considered vital pieces of our economy. How can we sanely say something is financially vital to our country, and then exclude 99.9% of the population from it?

Regarding exchange business models: What about a transactional business model? Give people free access to the market, cut out the brokerage middle men, and charge players to place transactions?

Regarding DMMs: if there's a financial incentive to add liquidity as a DMM, why wouldn't the market naturally fill the role? Why auction the role off to the highest bidder?

"How can we sanely say something is financially vital to our country, and then exclude 99.9% of the population from it?" <-- How can we declare a private bank "too big to fail"? I mean, no we can't, but this isn't the only insane situation here.

"What about a transactional business model? Give people free access to the market, cut out the brokerage middle men, and charge players to place transactions?" <-- who fronts the cost of the exchange? Electricity, rent, salaries, etc. Amortizing the cost through trading fees isn't fair to those who trade, because there would be users of data who don't end up paying at all. I think if you accept that they are private businesses, the pricing model makes sense.

" why wouldn't the market naturally fill the role?" Let's say the market starts falling rapidly. In a pure-market system, no one would be able to sell. The DMM obligation ensures that, at the very least, some people would be able to sell at some reasonable price. Think about insurance companies: you make a small amount of money most of the time, and every once in a while you need to make a large payout.

In the heat of criticizing the financial industry, I forgot to say that I'm enjoying your posts, and I think what you're working on is really cool. :-)

A long time ago, there was a startup called Digital Island. They were a small(er) exchange (or is the term "market maker"?), but they handled about 20% of NASDAQ's daily volume.

The good thing was, they would let you buy their data post-facto (not realtime). At the end of the day, you could download their entire set of completed orders for the day. The cost was minimal ($30/month, IIRC).

But they were bought out by NASDAQ, and NASDAQ shut down this data-sharing program. Which, to me, reinforces the point that the powers-that-be don't want to lose control of the information; it's a pay-to-play system, and information is one of the privileges to paying the big bucks.

One would assume that being a heavily regulated system, it would be expected that all orders would be open to the public (at least the historical ones), to ensure transparency. But one would be mistaken.....

> "powers-that-be don't want to lose control of the information"

This. What happens when they inevitably do?

They won't. To lose control of the information, the way it is _generated_ must become decentralized. While this may happen (e.g., it does in foreign exchange markets to some extent), it will not be _this_ kind of information, but something completely different.

They are probably pretty convinced that if your only competitive advantage is restricting access to information, you are doing it right.

I mean, isn't capitalism basically wrapped around the idea that without competition, businesses will act in their own best interest, which is diametrically opposed to the interests of consumers? That is to say, given the choice any "smart" business will leap at the chance to lock out competition, because that is in the best interests of the business (if it can get away with it)?

Anyway, what this is really about is getting the information faster. I don't really see anything wrong with that; some information is just time sensitive, and a good informant will practically be in the business of getting you information faster than his competitors... I see this as much the same thing.

No, capitalism is not a zero sum game, if that is what you're implying.

That's not what I mean. A corporation and its customers can both profit- one does not have to do poorly for the other to do well.

I only mean that a corporation can arguably do better (for itself) if it doesn't worry about things like regulations or competitors. A classic, classic example is dumping sewage into the ocean. Companies continue to do it even when it's legislated against.

It's not so much restricting access to information as getting and acting on it quicker.

In "the olden days" there were very similar trades done by people who (for example) could get information about tea clippers from China arriving in England. Now, it's automated, but the idea is the same.

It's about who can afford to buy the fastest hardware on the fastest pipes

I think you underestimate the skill required to do that. I mean, Google is not king of search just because they can afford bigger datacentres than Bing. Search is not just "looking stuff up" that anyone with access to Wikipaedia could figure out in a few days, even tho' there is an article on MapReduce!

You might want to check out this paper by Alexander D. Wissner-Gross and Freer: http://www.alexwg.org/publications/PhysRevE_82-056104.pdf

Neat!

I'm not sure "the public" wants access to microsecond trade order data. I mean, I could send it to my mom's laptop, but she'd probably be pissed.

It's the market makers who are fulfilling these orders and the strike prices are already set once the HFT algos get in on the action (right?). I'm assuming that if the MMs had a problem with it, they'd have the clout to do something.

From part 1:

    Question: Why don’t more people do it?

    Answer: People do try, but its not as easy as it looks.

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