We have voiced our thoughts on latency arbitrage in our white papers, as well as prior blog posts here.
Today we read this in the WSJ:
“Wall Street’s fastest traders have their eyes set on the newest speed–the picosecond, or one trillionth of a second. But even as trading reaches its fastest levels yet, companies with the need for speed are running into a pesky problem: the speed of light.”
“When you look at what you need to do to get a trade from a firm to the exchange and back, there are other things involved–like physics–that make it difficult,” said Mark Palmer, president of StreamBase Systems, which develops trading tools and platforms. “When you get to that level, you are starting to approach speed-of-light problems.”
“While no one is actually executing trades in the span of one picosecond yet, the race is on to start clocking parts of a trade in this smallest of measurements. Engineers are now working on getting a single chip inside a computer’s central processing unit, for instance, to run at their fastest speeds yet.”
“Adam Sussman, director of research at TABB Group, said people aren’t measuring the trading process in picoseconds. But “if you begin to slice your process into ever-more granular steps, you start to see things in picoseconds,” he said.”
“In order to stay competitive, many are paying to rent space within or near the exchanges, a practice called co-location.”
StreamBase, founded by MIT engineers, follows a similar approach. “We hired 40 engineers and have them think really hard,” Palmer said. “Five years ago, five milliseconds was actually fast. Now, five milliseconds is really slow. It means there’s a bug in your system.”
“Still, these speeds can be a stretch for firms unable to pay for technology whose price increases with its velocity. For now, those able to pursue the picosecond are mostly capital-rich hedge funds, proprietary trading desks and the technology companies that try to meet their needs.
“The danger comes in because whenever you put in sanity checks–where you put in a filter that says, ‘do I really want to do this?’–that adds to the latency in your system,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business.
And trading at these speeds enables the companies with the deepest pockets and fastest servers to snap up an increasingly large portion of trades.
“The market structure is outdated and was not set up with the expectations that people would be trading at these speeds,” said Rich Gates, founder and portfolio manager at TFS Capital, a Pennsylvania-based investment adviser.
“We are in the race to zero along with all our competitors,” said Steve Bonanno, chief technology officer at Direct Edge, who noted that most trading is still being done in microseconds currently.
“Eventually we won’t be able to go any faster,” he said.
Are we hiring engineers to rebuild Haiti? Are we hiring engineers to fix our air traffic control system? Are we hiring engineers to rebuild our highways? Are we hiring bright minds to work on finding cures for Neurofibromatosis? Are we hiring young minds to develop gene therapies to stamp out orphan cancers?
No we are hiring engineers to figure out how to trade in picoseconds. Why is this speed necessary? Why is our industry spending billions of dollars on technology to achieve this speed? Will this spending result in picking stocks to buy at $10 that will appreciate to $50? Will this result in new public small-cap capital formation? No
This will result in larger brokerage firms and hedge funds getting even larger by beating long term investors to a quote. Legalized stealing. Having fun?
What are you thinking about? An enhanced market structure that will attract capital to our shores, and make America lead the world in industry again?
Or, like Mr. Sussman, are you beginning “to see things in picoseconds” in order to beat investors to the quote.