High Frequency Trading Next Door - Part I
As soon as hot summer comes to Belgium, there is a natural migration from French-speaking Wallonia to the western coast of the Flemish region of the country. Here, à la mer du Nord [ French on the coast of the North Sea ], people relax on the sandy white sand beaches and ride the famous ATVs (called cuistax here). The western coast of Belgium is the (sea) haven of many, so I could not refuse the two relatives living here to spend a week with them à la mer du Nord . For the first time, I decided not to bring dozens of books with me, only one article under discussion titled “Can brokers get everything at once?”, But it was so hot that I decided to just drink mojito on the beach.
The only place I went to was Wörn , a typical small Flemish town where I tasted several local beers. A week later, I returned to Brussels, and on July 16, 2014, Bloomberg announced that a prop-trading company in Chicago had acquired an old tower in ... Werne for 5 million euros. What a coincidence!
I studied high-frequency trading (HFT) and wrote about it since 2012 and have a good idea of radio relay communication lines [ radio relay communication lines transmit microwave radiation], which are used by high-frequency traders, but I did not know that since January 2013 Jump Trading owns a tower in Belgium - next to my house. Being at the center of the problem, from a geographical point of view, I decided to investigate the radio-relay communication lines owned or used by large high-frequency traders here in Europe as my “extra-curricular work”. If Jump has a tower, competitors should be nearby - the only question is, where? I asked myself the question: “Can I find them all?”, And then my research began, or perhaps even an obsession. I discovered too many things to discuss in one post, so I divided the whole story into 5 parts. This, the first part, will be called “Mapping HFT Communication Lines”, although the title “How I became an expert in the field of potato fields” would be more suitable.
From Chicago to Belgium or A Brief History of Tower
The first part of my book was more about the “revolt of HFT machines” before and after the era of regulation of the US National Market System. Describing the phenomenon of the rapid growth of ECN systems [ ECN - Electronic Communication Network, an electronic trading system that seeks to eliminate the role of intermediaries ], such as, for example, Island , I realized that Chicago markets are more interesting in light of the development of these technologies than the stories of Wall Street traders cashing in on the small order execution system [ eng. SOES, Small-Order Execution System]. Therefore, the second and fifth parts of the book are focused on Chicago, in particular, on the transition from old stock pits to automated systems, which are now located in huge data centers.
The history of the exchange in the City of the Winds is a real concrete example for those who are interested in the automation of goods and financial markets. I wrote about the telegraph in Chicago; the first telegraphic tweet received in Chicago just three months before the first exchange, the Chicago Board of Trade, appeared . CBOT - the Chicago Board of Trade - ITinvest is working on providing access to the site ], was sent in April 1848. I even found the phrase "instant warrants" [ Eng. flash orders] in a 19th-century Chicago newspaper that described the practice of traders using private telegraph lines to buy goods whose prices, according to traders, should have jumped in a few seconds, so that they could resell at a higher price what they bought seconds earlier - is familiar?
You can find many other interesting historical precursors of modern practices. For example, long before the existence of towers with the transmission of microwave signals, similar to the one located in Wörn, the Chicago Board of Trade itself aimed to own a tower. Its first location was the tallest building in the city, and when in 1885 the stock exchange needed to build its own building, the building became the tallest in Illinois, as well as the first electricity-powered building in Chicago. Frank Norris wrote about her in his novel Pit :
Illuminated office buildings, a veil of rain, obscure reflections in the sky and the pit of the Chicago Board of Trade towering above them, dark, gloomy, monolithic, leaning to its base, like a giant sphinx with closed eyes, silent, gloomy - crept here without a sound, without signs life, under cover of night and a floating veil of rain.
In the 1920s, board members voted in favor of building a new building that would become a “temple of capitalism” and brought together architects, traders, and several leading telegraph companies to find ways to improve the social space of stock pits. Traders were dissatisfied with the excessive noise, and telegraph companies such as Western Union and RCA lobbied for the installation of high-speed communication networks. When the Chicago Board of Trade building was built on Jackson Boulevard near LaSal Street, 4,300 kilometers of telephone lines and 240,000 kilometers of telegraph lines were drawn from it - the first step towards a car uprising. It towered over Chicago until 1965, and a faceless statue of the fertility goddess Ceres graced the top of the building.
The heart of the exchange was a pit, and in it, accordingly, the latest technological advances were concentrated. The first stock pit was patented by Ruben S. Jennings in 1878, and soon the Chicago Board of Trade began to build all sorts of pits without paying any fees to Jennings. The inventor tried to sue the Chicago Board of Trade, but lost, and his patent was invalidated by the judges. Jennings designed the stock pit so that one trader could see and hear the other in the best way. For this reason, pits have several steps; a trader sitting at the highest level has a better overview, and also has an advantage in the ability to easily see and hear colleagues, and therefore, to carry out transactions faster, traders located in the middle and lower parts of the pit. Crucial here is speed.
Therefore, growth played an important role in increasing speed. The growth of the trader has become an advantage, which is why former basketball players or soccer players sometimes became some traders: “ taller traders are easier to see .” In the 1990s, some traders wore high heels while in a pit to carry out transactions faster, and inevitably received injuries due to a lack of balance. This forced the Chicago Mercantile Exchange [ Eng. CME - Chicago Mercantile Exchange ] in November 2000 decide to set the maximum height of the heel and / or platform to two inches.
The introduction of heel height standards was one way to balance the odds on the trading floor in terms of speed at the exchange floor. Not so long ago, the last place in Europe where open bidding is held is the London Metal Exchange. London Metal Exchange], which is called the “Ring”, fined traders for violating the rule that transactions can only be concluded while sitting:
The dealers who stand create an unfair advantage and may obscure the view of other traders and members of the LME pricing committee, ”said a spokesman for the British exchange.
Computers are ahead of a person in speed, regardless of the height of their heels, so by the 1980s and 1990s, computerization on exchanges had grown tremendously. History, written by Donald MacKenzie in his book "Mechanization Merc: Chicago Mercantile Exchange and the development of high-frequency trading" [ Eng. Merc - short for Chicago Mercantile Exchange ], describes, it seems to me, a turning point in the transition between transactions carried out by people and machines.
Read also: Three very expensive milliseconds
After CTB issued E-Mini contracts in 1997 [ E-Mini is a full-fledged futures contract equal to 1/5 of the standard contract for the S&P 500 index], the exchange built a platform in the form of a semicircle above the pits, on which the first users of Globex system terminals are located.
“So 'high and low sitting' came about,” says Mackenzie. “Arbitrage transactions between S&P 500 futures that are traded in a stock pit and E-Mini contracts that require five times less space to trade. Two collaborating traders - one in the pit and the other sitting above the Globex terminal - gave signals to each other with their hands or with the help of radio headphones. ”Hand signals used since the 1930s by traders known as arbitrageurs were faster than shouting. Now, these signals were sent up, as if trying to attract the attention of Ceres. The new “deity” was no longer a statue, but a faceless computer, and the name of the goddess began to wear the HFT-company Ceres Trading [ eng. Ceres - Ceres ].
One of the ex-traders at CTB S&P 500, who worked in the stock pit, describes the work on the platform in an interview with Mackenzie:
“When you went to the site, did you see towers towering above the S&P stock pit? Such ... reach almost the ceiling, and in each a few people are sitting at the terminals? So, these guys are selling E-Mini ... Some do it very, very, very good, incredibly good. "
Please note that the ex-trader uses the word "tower" here, because many HFT companies were born on these platforms. Here the founders of Getco began . Global Electronic Trading Company ] Daniel Tierney and Stephen Schuler, but after reading the article by Mackenzie, I found two more traders working with Globex terminals on the tower: these were Paul Gurinas and Bill Disomma. The company they founded in 1999 was nothing more than Jump Trading. Even before the introduction of microwave links, towers played an important role in trade. In the photo - Paul Gurinas, working in the CTB pit.
Microwave Radiation and Everything You Need to Know About HFT
Simply put, traders are algorithms, and exchanges are data centers. Many, if not all traders are placed at the same distance from the exchange engine, bringing buyers and sellers together. The search for pairs occurs in tens of microseconds. In this new HFT ecosystem, information - between two exchanges, for example - must move very quickly. This led some HFT competitors to use faster technologies compared to fiber, the most modern of which is microwave radiation.
Microwave radiation, generally speaking, is an old technology, besides, as it turns out, with significant disadvantages: it is unstable to rain and fog, has a limited bandwidth equal to 10% of the optical fiber capabilities, which is why it is necessary to rewrite existing algorithms. However, microwave radiation offers both a quicker start and a more direct route. There is no need to lay fiber-optic cable through the mountains, as Spread Networks did in order to cross the Allegany mountains, according to an article by Donald Mackenzie, Daniel Buenza, Yuval Millo and Juan Pablo Pardo Gerra.
Just mount the antennas on the towers and find the shortest distance between point A and point B, that's all. Market orders are transmitted faster through the air than via fiber optic cable underground. The map below shows the relay links between the New Jersey and Chicago data centers (if you want to know more about the links between New Jersey and Chicago, read this article ):
Some relay links between New Jersey and Chicago. Image from McKay Brothers / Quincy presentation at Data Trading Show 2014
But remember that the Earth is a ball. You can go from point A (exchange in New Jersey) to point B (exchange in Chicago), but you will have to take into account the curvature of the Earth. Even using specially tuned antennas, you will have to reckon with nature (which is why, as an anthropologist, I spent a lot of time studying these communication lines: the essence of their creation is domination of nature). If you want to succeed, you will need high radio towers to overcome the curvature of the Earth. But high radio towers are rare, so they are expensive. Moreover, if there is at least one tree or one leaf between two points / antennas, the connection will break. The path must be clear of obstacles.
To summarize. Microwave radiation requires antennas. Antennas need towers. Towers should be located as close as possible on a straight line between two points / exchanges. Different competitors need to find a suitable tower located at the shortest distance between two points. The bottom line is that sometimes you cannot install the antenna because someone else has already installed it (many antennas cannot be installed on some towers, in addition, the towers are often already occupied by other companies - mobile operators, central radio stations, etc. .). Therefore, you need to be smart if you intend to establish an HFT-communication line - perhaps competitors have already occupied the tower that you need. High frequency trading is hard work.
Read also:Frantic bulls: how Wall Street became dependent on high-speed trading (series of materials)
In early July, after Bloomberg published an article about Jump and their tower in Houtem, I realized that I live very close (4 kilometers) from the line between two major European points - London and Frankfurt (I am an honest person, and my house marked on the map). At a recent presentation in Chicago, one of McKay Brothers CEO Stefan Tych presented a map of radio relay links owned or used by some HFT traders in the UK: Radio relay links in the UK. Photo of McKay Brothers (on a click opens in full size)
Nothing is visible here, and there are no names. So I tried to designate all the towers and signed some names. Finding the towers was not difficult; drawing paths is hard, as most HFT traders try a variety of options: Jump had a line of communication between Belgium / France and England even before they took up a position on the tower in Houtem, but now they can directly get to Ramsgate and Basildon . My map shows not only some active paths, but also various attempts to win space:
Later I will talk about how I made a map (and about my crazy visit to the Jump tower in Houtem), but, in short: 99% of what I found is in the public domain. Just ask Big Brother, better known as Google (click on the buttons, and you will find links to all public files). In addition, I talked with people working in production, and they honestly helped me understand and understand this very, very, very closed world. They allowed me to achieve a result. This map is just a web of opportunities, where the Holy Grail are the shortest paths, and some companies at the same time jump from one tower to another. In this world, all companies know who their competitors are. It's not a secret. I just found places where some companies are located, or could be located, or will be located.
It is impossible to describe the whole world with the help of only photographs. Therefore, I did what all the players of the HFT market do: I created a file in Google Earth, a map with all the towers that I could find. The map is here . Open it, try zooming out. The signatures will be in Part V - Part I - only the introduction.
To be continued ...
PS If you notice a typo, mistake or inaccuracy of the translation - write in a personal message, and we will quickly fix it.