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Goldman Sachs is spending $100M to shave milliseconds off stock trades

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Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#221
post #110

Markets around the world are determining prices on a massive variety of instruments that derive value from the current and future value of products such as currencies, interest rates, equities, grains, livestock, metals, oil, gasoline, natural gas, and electricity. These prices allow us to prioritize resources, make fair transactions, and manage risk (i.e. buy insurance on the value of critical products so that we ca…

I just have a nitpick with your analogy to feedback loops.

Assuming the market can be said to have a Nyquist rate, then once you hit that you have all relevant information. Increasing the sample rate past Nyquist does not make a system more stable unless you have a very specific system designed specifically to take advantage of that. More typically, it just increases your noise-bandwidth product and can decrease total system stability and accuracy.

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#223
post #110

Markets around the world are determining prices on a massive variety of instruments that derive value from the current and future value of products such as currencies, interest rates, equities, grains, livestock, metals, oil, gasoline, natural gas, and electricity. These prices allow us to prioritize resources, make fair transactions, and manage risk (i.e. buy insurance on the value of critical products so that we ca…

That gives these mechanisms way too much credit. Markets can benefit from a more accurate valuation but ms-response times are not needed for this. The real reason are competitors. You have an advantage if you have the faster line. In the name of fairness there are lines of the exact same length* in many trade centers precisely for this reason. There are bots that feign transaction so that others react in a specific w…

> There are bots that feign transaction so that others react in a specific way. In the last moment these are canceled again, too late for competitors to still react.

In stock exchanges at least, what you describe is called spoofing. The regulators are not friendly towards it, because spoofing enables to skew price discovery.

It's generally hard to detect and hard to prove, but there have been cases where the regulators have proved sufficiently well that in certain cases, there were orders never intended to be executed. And yes, if you get caught, there are sanctions.

https://en.wikipedia.org/wiki/Spoofing_(finance)

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#224

People love to rail on HFT, but at this point, its really not that profitable. It's just a reality of trading in the markets. There was a blip of time between 2008 and 2014 when HFT was extremely profitable. Those inefficiencies have been gone from the market for years. People were whooped into anger about how much money was being made, at this point its a complete non issue and needs to be removed from the highlight…

> People love to rail on HFT, but at this point, its really not that profitable.

But it is a huge barrier to entry now; it also is a waste of resources.

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#225
post #222

To me this is incredibly ridiculous, millions more dumped into the brain draining maw of finance.

Forgive the AMP link but Bloomberg has a paywall of sorts now.

https://www.google.com.au/amp/s/www.bloomberg.com/amp/opinio...

> And while Scientel clearly has high-frequency trading in mind—“the name that keeps coming up among industry sources is Citadel”—that’s not all it has in mind. It’s a tower that can send signals for lots of stuff. “Scientel has said it will equip its Aurora tower with 28 antennas—24 for public safety and municipal use and four for ‘private’ purposes.” People often complain that high-frequency trading encourages a socially wasteful arms race, and you certainly see some of that here, as lots of trading firms compete to put their antennas as close as possible to the CME servers. But another way to interpret this story is that high-frequency trading is subsidizing high-tech communications infrastructure for everyone else, building towers to send high-speed signals for public safety and municipal use just to justify a couple of high-frequency trading antennas.

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#226

Earlier quoted context omitted.

We know, empirically, that a lack of liquidity increases trading costs, which in turn is directly channeled to the prices of goods and services that rely on this liquidity (more or less everything in the world, even more indirectly ones like education). It's difficult to say 'things would be X% more expensive' because of the interconnected complexity the GP was talking about, but there is definitely a very apparent b…

Not a hostile question, I'm genuinely trying to understand this: How is liquidity provided by, for example, someone interjecting themselves into a trade that was already going to happen?

If you want to move a large amount of money into an asset, you either have to place bids and wait for people to take your order at a particular price, or you have to pay a slight premium to dig into the ask side of the book and pay more money as you consume orders and liquidity.

If you place an ask and the price moves down it might not fill, so you have to move it over time while the price slips.

People provide liquidity by seeing your new sell order and filling it quickly, or by leaving a large number sell orders that people can take immediately, which results in money moving more quickly and consistently.

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#227

Earlier quoted context omitted.

We know, empirically, that a lack of liquidity increases trading costs, which in turn is directly channeled to the prices of goods and services that rely on this liquidity (more or less everything in the world, even more indirectly ones like education). It's difficult to say 'things would be X% more expensive' because of the interconnected complexity the GP was talking about, but there is definitely a very apparent b…

Not a hostile question, I'm genuinely trying to understand this: How is liquidity provided by, for example, someone interjecting themselves into a trade that was already going to happen?

Willingness to accept a smaller spread, but more volume?

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#228

Earlier quoted context omitted.

Yes, that's the model. So, tell me. Would any profit be possible in an ideally functioning market? If so, how is any item worth more than the total cost of all inputs including externalities? If not, how is such a dynamic system attracted to an ideal state, given that those who would make the market ideally functional are best placed to gain from market inefficiency and dysfunction? Given an answer, do you have a sou…

In a perfect market, there would be no economic profit. Your entire comment is very interesting; sorry for the short response!

No worries at all. I know it's an extremely long comment on a comment on an article - thanks for reading it.

On further thought, the conjecture's behavioural outcome is actually not quite so analogous to 'salami slicing' as it is analogous to monetary policy caused inflation. In effect, the amplification effect would serve to create profit by creating an apparent valuable trade where none actually exists - such trades essentially print money. This activity would function much like the "profit" realised by a central bank when it chooses to print additional currency for redistribution at government prerogative.

However, monetary policy induced inflation is merely limited in effect to those exposed to any one central bank's monetary policy domain - and generally only occurs when the money supply is permitted to rise for all participants. The type of inflation produced by the activity outlined by the conjecture is inherently global - and would exert a pressure on all existing markets which permit this type of trading; and it is not governments, which are ideally responsible to those they represent, which benefit from this inflation - it is private market participants, in the profit they realise from each trade.

This would certainly seem to account for the new behaviour of central banks having to cut their interest rates to near or at zero to compensate for this asymmetric inflation to drive slowing market activity outside of the financial sector... if the conjecture holds - they appear to have entirely lost control of monetary policy to the global market - and those who are best placed to capture value in those markets as a gestalt - via this mechanism.

If the conjecture holds - and central banks and regulators are unable to reign in the behaviour globally - the economy will experience hyperinflation of Weimarian proportions. Unfortunately, such inflation will have vastly asymmetric effect - benefiting only those best positioned to participate in and drive the amplification behaviour itself.

Indeed, it appears to be a naturally occurring divergent state in a market permitting ever higher sampling and clearing rates. Such behaviours are increasingly profitable - seemingly without end - and so it will attract a geometrically accelerating amount of market activity until such activity is no longer profitable due to market collapse.

The analogy is a fascinating, and scary, thing. It's a bit like considering someone nucleating the economic equivalent of a false-vacuum collapse - or someone already having done so. I need to think about it more and find some way of formally stating and ideally disproving the conjecture.

We might disprove the conjecture by looking for anti-correlations in the growth, availability and capacity of high-speed trading and clearing in markets controlling for the returns of financial institutions instruments and portfolios and the changing monetary policies of various central banks under whose jurisdiction they fall. Simulation of economic systems with and without these elements might also yield some insights, when compared to market conditions at large.

Is anyone aware of any other similar research, work, and/or thought in regards to this concept?

Re: Goldman Sachs is spending $100M to shave milliseconds off stock trades

#230
post #131

Earlier quoted context omitted.

Nobody has the whole picture. I would say that the more extreme an individual event is, the easier it tends to be to understand in retrospect. This depends greatly upon one's analytical sophistication, level of market data, fundamental product understanding, and professional network (to know what happened in other firms).

If nobody has the whole picture, how can we be sure if it's beneficial? edit: Or asked differently: What do we have now with high frequency trade established compared to the situation before?

It's enormously cheaper to do business on markets nowadays. Back in the old days, spreads were sometimes multiple dollars on human-made markets with a lot of inventory.

With HFT, people compete to offer the best market, and spreads are in the pennies.

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