This paper demonstrates that traders gain nothing by positioning their computer at the midpoint between two financial exchanges — for example on a ship in the middle of an ocean — contrary to the recommendation in the article Physics in finance: Trading at the speed of light (Mark Buchanan, Nature, 11 February 2015). We show that, in fact, a trading strategy using cooperating computers colocated with the two exchanges will perform much better than a single computer located at the midpoint. This advantage of distributed trading strategies is non-obvious and — to my knowledge — has never been explained as simply and convincingly as in this paper. In the final section I examine the reverse issue: using distributed exchange server architectures that eliminate the need for distributed arbitrage strategies. Continue reading Colocation beats the speed of light
This post presents events that shaped the evolution of High Frequency Trading, the massive penny-ante arbitrage programs used by the high-speed traders.
Like most technologists, I approach history with some disdain–this despite an occasional “aha moment” when I am surprised by the fundamental impact of a historical event on today’s technology. But, when it comes to explaining the complex and supremely silly structure of the current financial markets, history is the key. Today’s market rules may seem utterly illogical, yet they were made for seemingly good reasons at some point in time, many years ago. In fact, at the high level, our market technology works the way it does mostly “for historical reasons”.
I started this post by making a set of notes for my own use and it grew to the point where I decided to share it. I hope that it will prove helpful to readers that need a quick perspective of the HFT history. I intend to update the post periodically, as my time permits. Please suggest changes by email or by leaving a blog reply/comment.
My focus is on the US stock market and the global Forex spot market, two very important but different markets that had to cope with the “issue” of HFT for two decades. I also cover the European stock market because of its leading role in HFT regulation. Continue reading A brief history of HFT
A few years ago, when looking introspectively at my failures and accomplishments, I thought about characterizing people, including myself, by their attitude toward problem solving. I started with a question: Why am I attracted to work on problems that have simple formulations but no known solutions? (In this context, I define a problem very generally, as a “precisely stated question with no known prescriptive or formulaic solution.”)
Here is my (a bit tongue-in-cheek) classification of the problem solving attitudes. It comprises three categories: pyramid-builder, theory-builder, and problem-solver. No one person fits completely in any one of the categories; rather, each of us is an amalgam of the three. And, to make it perfectly clear: the categories describe person’s attitude toward problem solving – not person’s abilities. Continue reading Are you a problem solver?