trading at lightspeed


Computers were originally introduced in trading because they are faster than us in responding to market signals. A human trader might buy up a million shares of Microsoft for $20 a share, and sell them the next day for $21, making a million dollars in profit. However, if the price of a stock is $15.67 in New York and $15.68 in London one moment, but jumps to $15.70 and then $15.69 a tenth of a second later, no human could react quickly enough to buy the stock in New York and sell it in London before the prices reversed.

To solve this problem, traders over the last few years have been building automated high-frequency trading (HFT) systems that compete by making thousands of trades a minute to maximize profit.

But delays in communication over a network can throw a monkey wrench in this scheme. These delays can be caused by many factors, such as slow routing computers, excessive traffic, routes that go through many different computers, and so on. On ordinary networks, like the Internet, these factors add so many delays that the time it takes for a signal to physically traverse fiber-optic cables is only a small fraction of the total latency (delay).

So currently, there are many projects to build faster fiber-optic cables, including one between Chicago and New York, to achieve faster HFT trades...

Because of how HFT operates — generally, the profit from an HFT trading opportunity goes to the first firm to act on it, while other firms get nothing, to beat other traders to the punch, this has led to a race between trading firms to have the fastest hardware and the fastest signal cables. Recently, the time it takes to execute these trades has gone from milliseconds (thousandths of a second) to microseconds (millionths of a second).

via KurzweilAI.