High Frequency Trading

Posted by | April 01, 2014 | Finance | No Comments

So you may have heard about this thing called High Speed Trading. It goes like this:

A broker sends out an order to buy or sell shares at a certain price. This goes to several different stock exchanges at the same time, people at each exchange then trade with the broker at the agreed price.

Stock Prices

Except that it depends crucially on the meaning of ‘at the same time’. Because if one exchange gets the information a little early, say a few microseconds, then someone else can profit by buying or selling what you wanted to buy or sell, before you, on the other exchanges. So a lot of money is spent on getting computers really close to exchanges, and on making connections as fast as possible, and on paying each other to preferentially get the information faster than everyone else. Physically, no information can travel faster than the speed of light. So with optical fibres transmitting information, this sets the speed limit on how fast a trade can get from point A to point B. But the fibres don’t necessarily take a straight line between point A and point B. So someone who can find out the information that you want to trade, and send their trade along a shorter route can get there first, and drive the price before your order gets there.

This story is about a group of people that decided that this was dodgy as all hell, and decided to fix it, not by going faster, but by going slower. They put in a delay so that the information that a trade was going to happen would get to each stock exchange at exactly the same time so that no-one could get there first and make a quick buck. They put in this delay using the same tech everyone else is using to be faster, with a long loop of optical fibre. Several kilometres long.

It’s well worth a read.

The Wolf Hunters of Wall Street, New York Times

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Gordon likes flying without a parachute, and enjoys a good apple pie.

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