Machines

High-Frequency Trading Approaches the Speed of Light

what me worry High Frequency Trading Approaches the Speed of LightThe finance industry is in a race against science being waged with transatlantic cables and ever-tinier chips. A new paper authored by a team of physicists, engineers and industry data experts explores what Physics of Finance blogger Mark Buchanan calls the “approaching singularity.” Improvements in the technology behind high-speed trades is being measured in increments of “sub-seconds” and approaching the physical barrier of the speed of light which will, as the paper puts it, culminate in an “all-machine phase characterized by frequent black swan events with ultrafast durations.” Or, in Mr. Buchanan’s words, “likely lead to disaster.”

The superhuman speed of these trades make it tougher to predict major financial crises, the paper says, citing the recent “flash crash” phenomenon. “In traditional human-machine systems, real-time human intervention may be possible if the undesired changes occur within typical human reaction times,” the authors note.

However:

Even if one sets aside the time taken for humans to physically react, it takes a chess grandmaster approximately 650 milliseconds just to realize that she is in trouble (i.e. her king is in checkmate). In many areas of human activity, the quickest that someone can notice such a cue and physically react, is approximately 1000 milliseconds (1 second).

Notwithstanding this biophysical limitation, the strategic advantage to a financial company of having a faster system than its competitors is currently driving a billion-dollar technological arms race to reduce communication and computational operating times down toward the physical limits of the speed of light – orders of magnitude below human response times. For example, a new dedicated transatlantic cable22is being built just to shave 5 milliseconds off transatlantic communication times between US and UK traders, while a new purpose-built chip iX-eCute is being launched which prepares trades in 740 nanoseconds (1 nanosecond is 10-9 seconds)

This is a really dense paper, but here’s what we got: machines are moving big chunks of money around faster than our eyes can blink or our tiny brains can comprehend, with the potential to cause crashes that are so lightening-quick they can neither be anticipated nor corrected before causing systemic trauma (because traders are still really fast at panicking). Thanks, science.

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com

Comments

  1. Out of morbid curiosity, I’ve been watching HFT for some time now, and it’s like a Formula One race at near speed of light. However, anyone can get into the race, more and more companies are jumping into into the game, and the whole thing is unregulated –  no qualifications, no need for safety, just put the pedal to the metal an go as fast as you can.
    Presently, it’s estimated there are about 3,000 drivers on the track trying to out manoeuvre each other at the speed of light.To me it appears more like a the making of a speed of light, suicidal demolition derby, and when the big pile-up occurs, nobody will know it happened until the economic system crashes in an nanosecond with no warning.It’s inevitable that there’s going to be a catastrophic crash sometime soon, and all the virtual liquidity will vanish along with amassed virtual fortunes (Trillions of dollars) investment banks purport to have stashed in their mattresses. I think it’ll be hilariousness when the cyber crash happens – and it most certainly, it will crash because fools and greedy morons are playing the game.

  2. Out of morbid curiosity, I’ve been watching HFT for some time now, and it’s like a Formula One race at near speed of light. However, anyone can get into the race, more and more companies are jumping into into the game, and the whole thing is unregulated –  no qualifications, no need for safety, just put the pedal to the metal an go as fast as you can.
    Presently, it’s estimated there are about 3,000 drivers on the track trying to out manoeuvre each other at the speed of light.To me it appears more like a the making of a speed of light, suicidal demolition derby, and when the big pile-up occurs, nobody will know it happened until the economic system crashes in an nanosecond with no warning.It’s inevitable that there’s going to be a catastrophic crash sometime soon, and all the virtual liquidity will vanish along with amassed virtual fortunes (Trillions of dollars) investment banks purport to have stashed in their mattresses. I think it’ll be hilariousness when the cyber crash happens – and it most certainly, it will crash because fools and greedy morons are playing the game.

  3. Out of morbid curiosity, I’ve been watching HFT for some time now, and it’s like a Formula One race at near speed of light. However, anyone can get into the race, more and more companies are jumping into into the game, and the whole thing is unregulated –  no qualifications, no need for safety, just put the pedal to the metal an go as fast as you can.
    Presently, it’s estimated there are about 3,000 drivers on the track trying to out manoeuvre each other at the speed of light.To me it appears more like a the making of a speed of light, suicidal demolition derby, and when the big pile-up occurs, nobody will know it happened until the economic system crashes in an nanosecond with no warning.It’s inevitable that there’s going to be a catastrophic crash sometime soon, and all the virtual liquidity will vanish along with amassed virtual fortunes (Trillions of dollars) investment banks purport to have stashed in their mattresses. I think it’ll be hilariousness when the cyber crash happens – and it most certainly, it will crash because fools and greedy morons are playing the game.

  4. Larry Linn says:

    I am still attempting to calculate the speed of dark.

  5. Larry Linn says:

    I am still attempting to calculate the speed of dark.

    1. Spds2001 says:

      darkness – the opposite of light, and all the features it should be opposed, includingmath (digital), so the speed of darkness = – (minus) the speed of light. Teach scienceanlogsaksonskie idiots, advice you on the Russian

  6. enkidu123 says:

    Before HFT: spreads were minimum 6.5 cents,there were no discount brokers, your 401k money in those equity mutual funds were front run by “specialisst” on the nyse floor who had a monopoly trading.

    After HFT: there are no less than 14 exchanges where you can get the best prices and tons of liquidity. 1¢ spreads, and tons of discount brokers where you can trade from your iPhone. You get executed immediately. Yeah, and your mutual fund pays less too.

    So what you would rather have instead of a computer making public quotes, albiet a lot of them, are back room dealers who have a monopoly on trading? Most of the complaints are from dinosaur traders who can no longer rely on being from the correct frat house to make an easy living. They now have to provide value. That “flash crash” mind you was caused by a *manual* trade, where some idiot dumped 4.1 billion sp500 futures on the market, and it cleared in 20 min, and corrected just as fast, by you guessed it, HFT algos.
    So instead of a bunch of chicken little sky is falling nonsense that you would expect out of talk radio, I expected a little more informed though here.