Frantic bulls: how Wall Street became addicted to high-speed trading. Part 1

Original author: Jerry Adler
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Previously, Wall Street relied on companies that produce goods. Now she puts only on technology that allows you to make trading operations as quickly as possible. Editor’s Note: One of the most noteworthy moments in the crash


that happened with Knight Capital Group - a trading company that lost $ 440 million this week [the article was published on the website of the Wired magazine on 03/08/12 - approx. translator] - the speed of this collapse. News reports reported that most of the transactions that led to falling stock prices and colossal losses occurred in less than an hour. And this fall, provoked by the actions of the software, once again made the financial community think that the race for profit could eventually turn into a choice of fast, but poorly managed and insufficiently “intelligent” software solutions. We publish this story before its official publication in the September magazine Wired, as it demonstrates how close Wall Street has come to a point,

In 2012, the two-day conference of algorithmic traders New York Battle of Quants took place at the end of March, only a few days after a group of researchers admitted that an error was made in an experiment that could undermine the foundations of modern physics. . Researchers have stated that subatomic particles called neutrinos can travel in space faster than the speed of light.

[ Physics and mathematicians are called “quanta” in the western stock exchange community, building algorithms for profit from short-term price fluctuations, based on quantitative analysis — approx. translator ]

However, they were wrong: six months later they had to retake their statements. And, since we have no reason to doubt the postulates of the Special Theory of Relativity, the news that neutrinos obey the laws of physics as before, put an end to the pursuit of quanta-physicists, engineers and retrained mathematicians-financiers generating at least 55% of the trading turnover in US shares - for their pipe dream. But the ability to send signals faster than the speed of light could provide markets with previously unprecedented profits - in the final analysis, this would be tantamount to bidding “in the past” —it is the same as putting on a horse after the race.

“In the period between the first material that came out in September and the last week, a guy from my store wrote two articles explaining how this could become a reality,” a graying ex-physicist utters sympathetically over a cup of coffee, examining the huge painting by Keith Haring, which clearly dominates above other objects in the hall of the Chrisrie's auction house, where the conference takes place. “And of course, you would need a particle accelerator to do this.”

If the requirements were to end there, someone would certainly have done something. One of the main topics of this year's conference was the “race for survival” - a competition in which price was not an object of interest, and which consisted of finding an absolute theoretical minimum of time spent on one trading operation.

This variable, called latency (latency), is rapidly approaching the physical limit determined by the speed of light and quantum mechanics. But perhaps even Einstein did not fully realize to what extent electromagnetic waves are obedient to the will of money. Kevin Mac Partland of the Tabb Group, who analyzes information on the financial industry, predicted that in 2010 companies would spend $ 2.2 billion on the creation of trade infrastructure - the purchase of high-speed servers that process data from the auction, and fiber-optic cables connecting them to a network that will connect the whole globe. But this happened even before the project was launched, connecting New York with London with a new transatlantic cable, and London (via the Arctic Ocean) with Tokyo - and all this in order to

High-frequency traders [ tracing paper from English has also taken root in Russia - HFT - traders (High Frequency Trading) - approx. translator ] - a subset of quanta, investors making money in a new way: per unit of time they receive a cent fraction multiplied by hundreds of shares - and so tens of thousands of times a day. These traders take an abnormal position on Wall Street, bringing into its atmosphere an unusual mixture of timidity and arrogance, so unlike the pure, uncomplicated arrogance of ordinary investment bankers.

One of the pioneers of high-frequency trading, Trade worx, occupies a fairly modest office in two spans from UrbanOutfitters [a company for the sale of clothing, accessories and home goods aimed at youth - approx. translator] in a sleepy suburb of New Jersey. Twenty people work here, about half of them are “traders on the floor” [ i.e. traders working in the exchange hall - approx. translator ], each of which immediately monitors three monitors that display the per-second fluctuations in the share of pennies. Through this quiet, sunlit room with brick walls per day, only 1.5% of the total volume of shares traded on US exchanges passes.

On the first day of the New York conference, Aaron Brown, the legendary quantum and former professional poker player, comes on stage in rumpled chinos and a leather jacket to give a lecture on game theory. He opens his speech with the words "3.14159", after which he pauses in expectation. From the corner of the hall comes the answer: "265358". Together, the two named the first 12 digits of pi — the secret geek password.

“Here you are unlikely to find those who are called the powers that be,” says Charles Jones, an economics professor at Columbia Business School. "For many of those who came here wearing a tie, this tie is probably the only one."

The wheels of the financial world are spinning faster and faster, and at the same time the risk of a sudden catastrophe is growing, when minor changes somewhere in the bowels of the system will grow into a global crisis in a split second.

“For the first time in the history of finance, machines have started bidding so fast that people have no way to intervene in this,” said Andrew Haldane, Bank of England manager, at another recent conference. “And in the future, this gap will only widen.”

This movement is gaining strength for more than ten years. People making investment decisions based on their own assessment of the state of the economy and forecasts for individual companies are forced to retreat. Computers - guided by news feeds and trend information generated by other computers, interacting only with each other - are gaining popularity. The traditional economy considers all this as a pure good: no one doubts that all tenders strengthen the economy, as they increase the “liquidity” - the ability of investors to buy or sell assets at the best price.

Indeed, in 2007, the SEC [ The United States Securities and Exchange Commission - Securities and Exchange Commission - approx. translator] put forward a new ambitious rule, and the US national market system was enriched with dozens of new trading floors, but now, when the transaction duration is measured in microseconds, and the price spread lies in the range of the sixth decimal place, for these new opportunities, most likely, a period of diminishing returns has come.

So if there are no new scientific breakthroughs in physics, you and I will observe a trend decline that began when the Rothschilds, according to legend, sent pigeons to learn the outcome of the Battle of Waterloo and use this information in the bidding process. For almost a hundred years, until the 1970s, the ticker apparatus (for receiving data) and the telephone (for sending commands) dominated financial communications. Now the focus is on a high-speed server connected to the exchange with the smallest possible fiber cable, since each fiber mile gives about 8 microseconds of information delay. Technology brings such profits to the financial world that any research and infrastructure costs that save those microseconds are worth it.

This race continues in the hardware world of the financial world. NYSE-Euronext data center [a group of companies formed during the merger of the New York Stock Exchange NYSE and the European exchange Euronext - approx. translator ], an international conglomerate that includes the New York Stock Exchange, is under construction in a suburb of Mahwah, New Jersey, 27 miles from Wall Street.

In addition to computers that handle trading on the exchange and are engaged in the selection of sellers and buyers with adequate offers for each other, there are high-frequency trading servers that receive information and form teams to sell or buy in accordance with algorithmic programs. Traders pay for the opportunity to put their servers in the same building, and in order to equalize the chances for everyone, engineers meticulously increase the cable length between all servers. Yes, we are talking about plus or minus a few feet of length. And about the speeds approaching the speed of light.

Now multiply these efforts by the width of the continent or ocean. The quantum or relativistic components of the inter-machine interaction, which does not require our intervention, are many times ahead of the human reaction. The trend that started with the pigeons will find its end in the world of subatomic particles, transmitting data that is out of date even before it arrives at its destination.

To be continued…

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