Tuesday, March 4

The problem with high frequency trading

I was working in Solomon brothers son when I first came across algorithmic trading. This is around 2000. You were 5 years of age then. We launched 4 of these models and the limit was 50000$ per day. 3 would propose trades and one would decide and then launch the winning trade. 

Life has moved on hugely since then son. It's become something like skynet from the terminator days lol. The equity markets are really strange. There is no money to be made. Take a look at the major players, hardly anybody on the sell side makes any money because there's no margin. Spreads are so tight. And therefore it's difficult. Good for retail investors like you and I but for the big boys it's getting stupid. The buy side, the asset managers and fund managers, who buy and hold for longer periods are still around and will be so as well but it's going to be a difficult time for equities son. So do think again about your career option of being a stockbroker. Not enough money. 

Be somewhere where technology supports you. Like you come up with new complex instruments and strategies while technology helps. Or go into the advisory business where you need to take nonlinear decisions. Combine your mathematics knowledge with knowledge of technology, philosophy, politics, economics and something that you will pick up later on - psychology. That's what's will help pay huge dividends son. 



The problem with high frequency trading | Felix Salmon

Last night, on BBC Radio 3, I was featured reading an essay about high frequency trading. I hope it’s fun to listen to, but if you want to read it, here you go.

One of the many consequences of global warming is that it’s now, for the first time, possible to drill under the sea bed of the Arctic ocean. The oil companies are all there, of course, running geological tests and bickering with each other about the potential environmental consequences of an oil spill. But they’re not the only people drilling. Because there’s something even more valuable than oil just waiting to be found under the Arctic.

What is worth so much money that three different consortiums would spend billions of pounds to retrofit icebreakers and send them into some of the coldest and most dangerous waters in the world? The answer, of course, is information.

A couple of days ago, I called a friend in Tokyo, and we had a lovely chat. If he puts something up on Twitter, I can see it immediately. And on the web there are thousands of webcams showing me what’s going on in Japan this very second. It doesn’t look like there’s any great information bottleneck there: anything important which happens in Japan can be, and is, transmitted to the rest of the world in a fraction of a second.

But if you’re a City trader, a fraction of a second is a veritable eternity. Let’s say you want to know the price of a stock on the Tokyo Stock exchange, or the exact number of yen being traded for one dollar. Just like the light from the sun is eight minutes old by the time it reaches us, all that financial information is about 188 milliseconds old by the time it reaches London. That’s zero point one eight eight seconds. And it takes that much time because it has to travel on fiber-optic cables which take a long and circuitous route: they either have to cross the Atlantic, and then the US, and then the Pacific, or else they have to go across Europe, through the Middle East, across the Indian Ocean, and then up through the South China Sea between China and the Philippines.

But! If you can lay an undersea cable across the Arctic, you can save yourself about 5,000 miles, not to mention the risk of routing your information past a lot of political flash points. And when you’re sitting in your office in London and you get that dollar/yen exchange rate from Tokyo, it’s fresh from the oven, comparatively speaking: only 0.168 seconds old. If everybody else is using the old cables and you’re using the new ones, then you have somewhere between 20 milliseconds and 60 milliseconds when you know something they don’t.

No comments: