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Someone got the natural gas report 400 ms early

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Re: Someone got the natural gas report 400 ms early

#201
post #192
post #169

Earlier quoted context omitted.

I've seen exchanges screw up clock time more often than I care to remember, often for the stupidest reason. I once had an exchange claim it was "due to a roofing contractor accidentally interfering with the satellite used to get a GPS time signal".

I would think that exchanges would be one of the few places on earth to nail clock time because they are so dependent on it.

Network syncing time is hard, my team (at a bank) built our own infrastructure to monitor time sync errors on our own internal servers, we synced externally with two independent clocks. An atomic clock in London and NIST in the US. But we also modelled the exchange's time as well.

We had six independent connections to the exchange (hitting different servers) and we'd reverse engineered the exchanges internal infrastructure so based upon the timing of their messages, the tcp packet headers and their own timestamps we knew exactly what clocks their internal servers were running on (more valuably in our case is it also gave us their internal latency figures). Half the time we knew when their clocks were drifting before they did and could tell them which internal server had the wrong time.

This stuff is hard, you need to know a lot about network latency and time to make sure you're doing it right (have a look at the NTP spec for starters), there's probably only a handful of people in the world who are capable of nailing it and probably most of them work in the military or atomic physics research labs.

Re: Someone got the natural gas report 400 ms early

#202
post #31

To make shenangins more obvious, what if 1 minute were the maximum resolution that any trade could happen? Say, every order gets a random number of seconds between 0 and 60 added to it before it is executed. Or even longer. What would happen if everyone gets 10 minutes to digest any news?

Or perhaps to encourage more long-term thinking there is a rate limit to the number of trades you can execute. We could start slowly: 1 trade per second, perhaps.

Re: Someone got the natural gas report 400 ms early

#203

Earlier quoted context omitted.

I think that HFT is responsible for over 70% of the volume on the major exchanges these days. Very little of what happens on the exchanges anymore is directly attributable to long positions. I'm not sure how current this is, but the average time a stock is held is roughly 20 seconds [1] and that's definitely not long-term value investing. I think we're already a long ways away from Kansas Dorothy, and I don't think w…

> over 70% of the volume on the major exchanges these days. Very little of what happens on the exchanges anymore is directly attributable to long positions. this isn't the same as being 70% of price movement. HFT is comprised mostly of market makers, who have books that, over the course of the day, are close to net zero. they do a lot of buys, but they also do a lot of sells. most price moves over the course of a day…

"we're not really that far from kansas"

Funny given that one of the largest high frequency trading firm, Tradebot, is based in Kansas City MO (not that far from Kansas)

Re: Someone got the natural gas report 400 ms early

#204

http://invezz.com/news/alternative-investments/625-uk-report... "Veteran traders would usually wait in anticipation for the weekly report of gas-inventory figures by the U.S. Energy Information Administration released on Thursday at 10.30 AM and then dive into the busiest trading window of the week. This is no longer true as most traders are now staying out of the market due to the HFTs new strategy - sending floods…

At what point will HFT drive out the proper functioning of a Market? Have there been any studies on this? If human traders mostly reacted to "real" news (the Orange juice crop is bad this year) then human trading was mostly linked to actual changes that affect the price mechanism But if large volumes of trades are speculative, or even worse, are directed at affecting the behaviour of other large Market players, is th…

To oversimplify, there are two kinds of trading strategy: value-based and momentum-based.

Value investors judge investments by the expected revenue from it if they hold on to it for long. HFT does not bother them, except in so far as it increases the amount of uncertainty that you can pick up bargains when you see them due to uncertainty.

Momentum investors, or speculators, judge investments based on whether they think they can soon sell higher than they buy. HFT is supposed to be bad for them, since very high volatility makes the kind of judgements they go in for harder. Usually, HFT is itself a kind of momentum investing, albeit of a strange sort.

If HFT reduces the returns from momentum investing while leaving value investment strategies largely unharmed, it might correct bad incentives in finance and so be a very good thing.

Re: Someone got the natural gas report 400 ms early

#205

"There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller…

I thought you were going to tell the even older story about the early days of the Monterey sardine markets.

The sardine report would be released every Friday morning at the docks. The sardine traders would employ runners to physically run the reports back to the market.

The traders who employed the fastest runners were naturally the most successful.

There was one runner nicknamed Slippery Jimmy not only for his elusive speed but also as a fish reference.

Years later Jimmy started one of Monterey's first sporting goods stores. He called it Slippery Shoes. Sadly, the company went bankrupt.

Re: Someone got the natural gas report 400 ms early

#206

Earlier quoted context omitted.

I think that HFT is responsible for over 70% of the volume on the major exchanges these days. Very little of what happens on the exchanges anymore is directly attributable to long positions. I'm not sure how current this is, but the average time a stock is held is roughly 20 seconds [1] and that's definitely not long-term value investing. I think we're already a long ways away from Kansas Dorothy, and I don't think w…

High frequency trader here: This is only looking at the volume on public exchanges. There are a lot of regulations around public exchanges which prevent them from operating efficiently. For instance, unless the stock has a very small price, you cannot offer sub-penny prices on this exchange. Most retail trades actually never see the exchange, they are sold in bulk by brokers to places like Knight or Getco who interna…

Yeah. I don't think it's surprising either, in fact when I was first writing the post I assumed HFT volume was closer to 95% of trade volume but I couldn't find any public numbers above 70%.

I think that dark pools are where the next crash will come from, but I'm by no means a financial wizard. The way I perceive it, dark pools and other nearly-invisible investment exchanges are scary in that the ramifications of dark pool trading can spill over into the light world (as it were) with dire consequences.

We'll see, I'm also thinking that the next crash could just as easily be caused by a rogue algorithm as a rogue trader.

Re: Someone got the natural gas report 400 ms early

#207

A fun thought experiment. Suppose someone invents a time machine that gives the correct price of all securities at all future points in time. 1) Would it be against current rules to trade on this information? 2) If someone did use this machine surreptitiously to their own gain, how quickly will they approach owning 100% of everything? 3) If the entire data set of future prices were made publicly available, what would…

> A fun thought experiment.

You're right, this is very fun!

1) No. There's nothing in the rules that says time machines are not allowed.

2) That's impossible. The only way they could own everything is if they could somehow go back to the beginning of time and buy Earth.

3) People would then stop trading stocks and actually produce stuff to sell to one another.

Re: Someone got the natural gas report 400 ms early

#208

Earlier quoted context omitted.

At what point will HFT drive out the proper functioning of a Market? Have there been any studies on this? If human traders mostly reacted to "real" news (the Orange juice crop is bad this year) then human trading was mostly linked to actual changes that affect the price mechanism But if large volumes of trades are speculative, or even worse, are directed at affecting the behaviour of other large Market players, is th…

It won't. High frequency trading slices the gap between offer and purchase into an enormous number of tiny slices, and HFT companies compete to see who can collect the most number of slices. But that does not affect the underlying factors that lead to most offers and purchases of stock. For example you could offer OJ futures at improperly high prices a billion times per second, but that does not mean anyone will buy…

What business fundamentals are they?

The ones that say Apple has the vision and skill to enter and exploit many more massive untapped markets as we've seen them do repeatedly compared to GM's fairly static markets?

Oh, wait...

Re: Someone got the natural gas report 400 ms early

#209

Earlier quoted context omitted.

At what point will HFT drive out the proper functioning of a Market? Have there been any studies on this? If human traders mostly reacted to "real" news (the Orange juice crop is bad this year) then human trading was mostly linked to actual changes that affect the price mechanism But if large volumes of trades are speculative, or even worse, are directed at affecting the behaviour of other large Market players, is th…

It won't. High frequency trading slices the gap between offer and purchase into an enormous number of tiny slices, and HFT companies compete to see who can collect the most number of slices. But that does not affect the underlying factors that lead to most offers and purchases of stock. For example you could offer OJ futures at improperly high prices a billion times per second, but that does not mean anyone will buy…

>For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does.

Their P/E ratios are very similar. Why does that surprise you? Apple is a very mature company. They're currently making huge earnings (which naturally lowers the P/E ratio if those earnings are not expected to continue at that level), and they're a big long-term risk because nobody knows exactly what's going to happen with Android vs. iOS. It's extremely plausible that margins in the smart phone and tablet markets will take a dive in the medium term as a result of vigorous competition, which is where Apple derives the bulk of their profits. Expecting Apple to be doing five years from now as well as they've done for the past five years is to expect them to come out with something new which is as revolutionary as the original iPhone. Maybe they will, but the market obviously isn't betting on that happening.

On the other hand, GM is not doing great earnings wise, but there is no obvious reason to expect that their existing customers are going to evaporate, or that their margins are going to change significantly from what they already are.

Re: Someone got the natural gas report 400 ms early

#210
post #201
post #192

Earlier quoted context omitted.

I would think that exchanges would be one of the few places on earth to nail clock time because they are so dependent on it.

Network syncing time is hard, my team (at a bank) built our own infrastructure to monitor time sync errors on our own internal servers, we synced externally with two independent clocks. An atomic clock in London and NIST in the US. But we also modelled the exchange's time as well. We had six independent connections to the exchange (hitting different servers) and we'd reverse engineered the exchanges internal infrastr…

> This stuff is hard, you need to know a lot about network latency and time to make sure you're doing it right (have a look at the NTP spec for starters), there's probably only a handful of people in the world who are capable of nailing it and probably most of them work in the military or atomic physics research labs.

Funnily enough, Google appeared to have made it work well enough for a distributed database: http://research.google.com/archive/spanner.html

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