Designing a Low Latency 10G Ethernet Core (2023)

Who is "People"?

Well now, I cannot claim to know what everyone did at any point in time, but allow me to be very doubtful that anyone other than a dedicated arbitrager/market maker would do that.

Or at least, I cannot conceivably see how one would do that and turn a profit without being also a market maker.

The economics of arbitraging are just too tight.

You need to spot and act on a cross exchange spread that is wider that:

- The exchange fees, for which market makers have rebates. So even at equal technological footing, MM will have an advantage over "People".

- The cost of funding, for which you will need to post IM, and thus already be a professional investor with a good amount of capital.

- If that was "before HFTs", then it was before odd lots as well. Now I don't know what the average price of a US share is, but let's say a couple hundreds of dollars, times 100 lot size. These "People" better be filthy rich in cash.

- Arbitraging at a couple of price levels (which is already a lot), minus costs, would yield you a couple bips per trade. To make any kind of real money doing that, you better do it a trillion times per day, and thus lock a huge amount of money.

- The market risk over the arbitraging period

I don't think I have seen anyone turn a profit arbitraging naively in the last 15 years that were not some kind of market maker already, or some ad-hoc strategy on very ad-hoc EM markets.

Nanosecond trading is honestly a bit unnecessary. There's academic studies somewhere that if I remember correctly showed little change in benefit to the stability of the market past tens of microseconds I think.

Now the reason why these ultra-high speeds in general are beneficial is because they make collaboration at scale or frontrunning information increasingly difficult the lower you make the trading latency.

This means that while your market makers like Jane Street may integrate outside data for predicting broad trends, the core algorithms for resolving spreads boil down to "what is the most efficient way to match these together" with little to no room for manipulation.

Market manipulation can cause volatility but your HFT market makers are going to eat that volatility at an incredible rate. Massive panics that would have triggered chaos in the streets and people dumping their 401ks get reacted to and their prices factored in within moments and as such prices adjust gradually rather than spiking and cratering and spiking again. HFT takes the blood out of the water so to speak.

Or as another example, HFT market makers act like a loosely attached mass (ex: heavy weighted chains) damping a piece of vibrating industrial equipment. Without the mass damping the system and actively pulling energy out of the vibrations reflecting through the chains, the equipment would rattle and rattle and more than likely the bolts fixing it to the ground would start to work their way loose. And once they are loose, vibrations can start to amplify into oscillations (doubly so if it's a "smart" system involving humans where you experience PIOs) and the stress on the system grows greater and greater. With those chains however each and every little vibration gets nearly any excess energy sucked out of it by the irregular reflections produced within the chains. That loss of energy dampens the vibrations down and while the machine is unimpeded in performing its function inside of itself, the excess energy in the form of vibrations, etc is heavily suppressed or effectively eliminated entirely helping reduce failures, stresses, and wear.

(Sorry for the overworded analogy but the mass-vibration damping analogy is really quite fitting to the way markets operate).

With the average internet latency (say 50-100ms) you can game the system and gain information early with expensive high speed links sharing the news around the world in a way that has near zero value due to diminishing returns w/ lower latency. Especially once light comes into play. If the competitive latency is on the order of distances light can travel within a country, that means once you factor out the essential parts that can't be cut out/sped up, what's left is a very small sliver that can be split between algorithms to make as efficient of trades as possible, algorithms to try and game the system, and integrating knowledge from distances proportional to the time it takes for light to travel it.

In other words at that speed you just can't really play fuck fuck games. The winning move is finding better local strategies (vs global strategies like market manipulation or exploiting information before it propagates).

/rant (sorry I should probably edit this down because I repeat myself a lot here but it's late and i'm tired so i'm just sending it.