Goldman Sachs is spending $100M to shave milliseconds off stock trades • Hacker News Board

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

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Post by justinjlynn » Sat, Aug 03, 2019, 1:32 AM UTC

eyeundersand wrote: post #252

justinjlynn wrote: post #228

Earlier quoted context omitted.

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 trade…

I'm an Econ grad student currently not paying attention in a Maths class (something about the Implicit Function Theorem) and I'm absolutely intrigued by your two comments. Kudos. Also, to sidetrack a little bit, may I ask how long it took you to gather these thoughts and post them? I'm trying to get a sense of how far along I am about gaining a holistic understanding of markets and trading.

While I don't think any time taken is necessarily a great indicator of general understanding, I was struck by a great feeling of unease while reading 1e-9's comment. Initially I sought to understand the apparent contradiction in the measurable reduction in arbitrage opportunity as a generally accepted proxy measure for increasing market efficiencies with my general understanding that HFT generally massively increases volatility and does not generally appear to result in the reduction of instrument pricing due to lower trading overheads and losses. I also sought to explain the seemingly unending profit stream made possible by such strategies - when, paradoxically the more efficient the market becomes, the less profitable all HFT stratigies should become globally - and yet, it does not seem they do.

All in all, about 10 minutes or so of consideration, followed by about an half an hour of editing.

That said, I'll likely spend much more time looking for existing models of financial markets under the information relativistic conditions created by HFT activity - it occurs to me that as trading moves closer to speed of causality in the market the models underlying market understanding may need to be adapted, perhaps using relativity as a prototype. With any luck they already have and I can elaborate from those to solve for conditions of such markets with information asymmetry and agents capturing value. If such markets are inherently volatile and that volatility increases geometrically nearing the speed of causality - presumably, the speed of light, then this may provide the mechanism for the apparent global inflation of instrument prices via distributed profitable high-speed trading activity while preserving lessened arbitrage opportunity and other visible market behaviours.

I really must formalise this so that it may be thoroughly and logically evaluated - both symbolically and under simulation. However, I'm at a disadvantage in that I am merely a dabbler in the field of economics and game theory. I also have no formal background in stochastic finance or physics. I am but a Systems Engineer. So, fun challenges ahead.

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

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Post by lallysingh » Sat, Aug 03, 2019, 5:23 AM UTC

dalbasal wrote: post #247

lallysingh wrote: post #177

Earlier quoted context omitted.

> Meanwhile, all this stuff costs money, people, resources that aren't available for actual productive work instead of overhead. That's a very high standard. What's productive? What's productive enough, in your book, to be worth the effort used here?

Median productiveness is plenty, assuming this is not productive activity.

But what's "productive?". Farming? Manufacturing? What if the farmed food is unhealthy? If the manufactured good is wasteful?

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

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Post by 1e-9 » Sat, Aug 03, 2019, 5:55 AM UTC

HSO wrote: post #273

1e-9 wrote: 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…

This is such a confident statement, and I don't mean that as a compliment. For starters, is the evidence behind this Hayekian market efficiency really so strong as to warrant this kind of absolute confidence in the wisdom of markets? > markets work by polling the expertise of many different parties who all understand a piece of how things should be valued. …as well as orders of magnitude more people who do not unders…

You misread my post. I never said the markets were efficient. On the contrary, they are generally far from it. What I said was that the markets combine the efforts of many different entities in order to determine prices in a way that is superior to what any one entity could do.

> Well, there are negative and positive feedback loops, only one of which is stabilizing!

Absolutely. Entities that consistently contribute positive feedback cause harm to markets and they are generally doing something that is either prohibited or foolish. I don't consider either a good long term profit strategy. The market regulation departments work to remove one and large losses tend to remove the other.

> This can also backfire. In fact, this is why a number of stock markets have instituted a trading stop if an asset moves "too fast". Slowing things down / reducing liquidity can stabilize a situation.

Sure, exchanges use a variety of market integrity controls, including limits on rapid and/or large price changes that can trigger order rejections or trading halts. These controls can be beneficial when the price fluctuation was due to poor trading, but can be damaging to a market when the fluctuation was due to significant new information or because there is a natural high volatility situation such as a derivative that is about to expire or is rarely traded. Consequently, the exchanges have to be careful about how and when halts are invoked. Some exchanges often get it wrong.

The main point I was making is that lowering the latency of the multitude of price discovery feedback loops making up the global market can be very beneficial because it allows the pricing dependencies to be more fully determined.

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

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Post by 1e-9 » Sat, Aug 03, 2019, 6:03 AM UTC

NohatCoder wrote: post #264

1e-9 wrote: post #127

Earlier quoted context omitted.

Over very short time scales, the price fluctuations vary from almost pure noise to almost pure signal. The almost pure noise situation occurs far more often, but even then, with good estimation techniques, you can extract a signal component that can improve pricing a small amount. Improving many interrelated prices by small amounts can lead to a significant overall improvement to the markets. The almost pure signal s…

The faster you can trade, the faster you can flash crash. The current state is that bots can crash the market faster than humans can react, how does that help stability?

The faster you trade, the faster you can detect and help limit or prevent a flash crash caused by others trading poorly.

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

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Post by 1e-9 » Sat, Aug 03, 2019, 7:28 AM UTC

FabHK wrote: post #301

1e-9 wrote: post #149

Earlier quoted context omitted.

My view is that current liquidity and pricing are far from perfect, particularly when it matters most (e.g. a market panic) and particularly in the global context of the vast universe of interrelated instruments that need better relative pricing. Given that we benefit from realtime pricing, milliseconds matter when you must determine a large vector of prices with complex dependencies using the ensemble recursive syst…

> My view is that current liquidity and pricing are far from perfect, particularly when it matters most (e.g. a market panic) And in a market panic, your friendly HFT shop next door is there and offering to buy and sell to stabilise the price? > Given that we benefit from realtime pricing Yeah, if you assume the conclusion that we benefit from it, then we do. But have you shown this? In which market do we benefit fro…

> And in a market panic, your friendly HFT shop next door is there and offering to buy and sell to stabilise the price?

Some are. It's not that they are friendly, it's just that doing so can be highly profitable if one can estimate the mispricing with a sufficient degree of certainty.

> In which market do we benefit from milliseconds pricing, compared to, say, an auction every minute?

I argue that all of the significant ones benefit. The global market is huge and interrelated in complex ways. There are many trading entities with a variety of specialties. They communicate their expertise through the markets by placing orders. It's an iterative process and a lot of information must be conveyed. The faster the entities can communicate back and forth, the more accurately the prices can represent a weighted consensus. Constraining the trading to 1 minute auctions would reduce the communication bandwidth.

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

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Post by 1e-9 » Sat, Aug 03, 2019, 8:06 AM UTC

spenczar5 wrote: post #251

jodrellblank wrote: post #248

Earlier quoted context omitted.

If it's unbiased, that's the same as saying it's random? If it leads towards efficiency, productivity, most beneficial allocation, as suggested, those are all biases.

An unbiased estimator is a technical term. It means that its errors in estimation are equally distributed above and below the true value. Edit to add: I am not sure GP was using the term accurately, either.

An unbiased estimator is one whose expected value equals the true value. Its sampling distribution can be asymmetrical with median not equal to the true value. You seem to be referring to a median-unbiased estimator.

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

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Post by amelius » Sat, Aug 03, 2019, 8:53 AM UTC

andruby wrote: post #236

amelius wrote: post #216

Earlier quoted context omitted.

Why don't we install a knob that we can turn that effectively limits trading to X seconds precision? One day we may decide to turn that knob from the millisecond range to 1 second and see what happens. If it's bad, we can always turn the knob back.

> If it's bad, we can always turn the knob back. Sure, but by then maybe some people or organizations have made/lost millions. So we can't realistically experiment with that (even though I would absolutely love to)

If a businessmodel is questionable from a societal viewpoint, then they shouldn't be surprised that some regulation hits them. See for instance Airbnb, where the businessmodel has become impossible in many cities already.

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

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Post by sumedh » Sat, Aug 03, 2019, 8:54 AM UTC

ycombobreaker wrote: post #239

sumedh wrote: post #208

Earlier quoted context omitted.

> the value of their stock is dependent on the value of many other equities, interest rates, energies, raw materials, etc. Exactly, its the same with other stocks. > The bid/ask spread is a separate issue from latency. Yes but it also the second point made by HFT's that they reduce the spread.

Any market maker's bid-ask spread will be dictated by a combination of factors, including aspects like latency (relative to competitors), expectations on holding time, historical volatility and spread (that one is somewhat circular), availability of information from correlated markets, ability to hedge into correlated markets (and what are _those_ spreads, as the market maker will be crossing that spread to hedge), t…

> will see a virtuous cycle of increased trading opportunities leading to revenue to stay fast.

Not sure whose revenue you assume to be fast.

Anyway I think you did not understand the point I was making, Berkshire's spread is huge and has been huge for decades, yet you dont see lot of people complaining.

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

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Post by MaxBarraclough » Sat, Aug 03, 2019, 9:25 AM UTC

sumnulu wrote: post #138

saberdancer wrote: post #89

Earlier quoted context omitted.

Those 100m are not destroyed by burning them in an HFT furnace but rather used to pay developers, hardware, factory workers etc. Sure, it's not going directly into infrastructure but it is not lost. In fact, it's quite possible that if it wasn't invested into HFT it would be held as cash by the company or paid out as a dividend (which is fine as well).

Burning money is not that bad, even burning 99% of all the money in the world.

...what?

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

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Post by JDiculous » Sat, Aug 03, 2019, 11:44 AM UTC

jmastrangelo wrote: post #296

JDiculous wrote: post #148

Earlier quoted context omitted.

Because having homeless people lining our streets on our commutes to/from our jobs is a daily reminder that if we don't work hard enough to increase corporate profits, then our bosses might lay us off and we'll end up like them. That or moral apathy. At some point in the 80s we decided that markets driven by business profits should dictate every aspect of society. I imagine 100 years from now they'll look back at tod…

I find it funny that people scorn the pursuit of economic profits, but complain that the other "better" activities aren't given economic rewards. Ultimately "Corporate Profits" produce the economic value that people desperately want, and participating in the creation of something people want _should_ be a prerequisite for getting economic value in return.

I'm not really sure what you're arguing here. All I'm saying is that corporate profits shouldn't dictate every aspect of society. That's why sane countries have implemented things like universal healthcare and free primary/secondary education.

I'm also proposing that in a wealthy first world country, perhaps nobody should have to go homeless. Crazy idea, I know.

What have these "corporate profits" you worship ever done for homeless people?