
Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders - lmg643
http://www.bloomberg.com/news/articles/2016-07-07/jim-simons-has-a-killer-flash-boy-app-and-you-can-t-have-it
======
lordnacho
HFT / Fund guy here.

This is marketing spiel.

If you just want to trade on a bunch of exchanges so no information flows
between them, you can easily (TM) write a program that either a) lines up the
orders at each exchange to execute at a specific time or b) delays the orders
from a central server by the line delay.

So say NYC is 13ms from Chicago. You want to hit both at once. As long as
you're not 13 ms late, nobody can see your order in one place and react at the
other. You don't need an atomic clock for that, NTP will do just fine.

They're doing this because they have a reputation as a technologically
advanced firm, and they know it will impress institutional investors, most of
whom are still living in a time warp where spreadsheets are an advanced means
of getting an edge over the market. They meet these guys, who are basically
from another dimension of investing, and they suddenly need an explanation to
their bosses of why RT can generate the most impressive returns of any
strategy ever. The answer is "we have loads of PhD math geniuses building the
strategies and amazing execution technology".

~~~
nycdatasci
They don't need to market; their returns speak for themselves.

As obvious as the idea seems in hindsight, no one on the sell-side has a
product like this right now. The closest thing is the Thor router, which is a
crude attempt to accomplish the same feat because it doesn't address variation
in latency. An algorithmic execution product like this would effectively end
latency arbitrage, which is a source of RenTech's livelihood. To hedge against
that, they have secured the IP rights to the technology.

~~~
beezle
"As obvious as the idea seems in hindsight" And the "obvious" should not be
patentable. And of note, this technique has been done before in the past in
different market and theirs is only an adaptation to the current equity
markets.

~~~
nycdatasci
I'm conflicted on whether or not a patent should have been granted. I've
worked in equity execution for about a decade and do feel that this is novel.

On the other hand, this is a clear case of using the patent system to secure
and persist an inefficiency in the market. It's hard to measure the cost of
such an inefficiency to institutional investors (mutual funds, pensions,
endowments, etc) but I suspect that it is well into the billions annually.

------
dahdum
_Its invention, developed by the firm’s co-chief executive officers, Robert
Mercer and Peter Brown, first sends an order to a central server, which breaks
it up into multiple smaller orders. Those are then routed to venues that offer
the best prices and most liquidity, much the same as brokers do now.

But before that happens, the smaller orders are sent to servers located as
close to the exchanges as possible, along with instructions on the precise
times they should be executed. The co-located servers sync their transactions
so HFT firms won’t have enough time to identify an order on one exchange and
then race to another to trade against it.

A crucial part of the system is the optical, atomic or GPS clocks that will be
used synchronize those orders. Renaissance says in its application that GPS
clocks are accurate to within nanoseconds and any time differences between
them are “too small to be perceived” by HFT firms._

Maybe I'm missing something but sending orders ahead and releasing at a
specific time is obvious is it not? If you add a really accurate clock
suddenly it's patentable?

~~~
kasey_junk
I havent read the patent but I can say this is an exceedingly common (I'd
probably say standard) strategy. I can only assume the atomic clock bit is
what's novel.

~~~
tibbetts
Using ntp or whatever the new variant is is also standard, which as I recall
can hit sub-microsecond consistency on a wide area network with good hardware.
So yeah, not new.

~~~
sargun
PTP - Precision Time Protocol.
[https://en.wikipedia.org/wiki/Precision_Time_Protocol](https://en.wikipedia.org/wiki/Precision_Time_Protocol).
It requires hardware support, and a stable isolator inside of the machines.

~~~
phyalow
Little know fact, you can use the GPS constellation to get atomic level
precision time nearly anywhere on earth. Using an Atomic clock is purely to
show off to investors/a red herring.

~~~
adwf
I would've thought that GPS is too unreliable due to the deliberate
inaccuracy? Only the US military have the clean signal.

Particularly if you're using it to sync between two different time zones that
could well be looking at different satellites.

However, I don't know how much inaccuracy is introduced and whether it would
have too much of an effect for the purposes of Google, et al.

~~~
Retric
That's been removed. But, just for fun.

Speed of light is 299,792,458 m/s. So if GPS is off by more than 1/10,000,000
you can't get accurate within 30 meters. Having used a GPS they are better
than that, thus the clock must also be at least that accurate. Of note,
stationary stations can get into centimeter precision which imply's vastly
higher accuracy.

~~~
btilly
Fun fact. GPS is so precise that they can detect the fact from GR that gravity
makes clocks run slower closer to the ground.

------
Johnie
This reminds me of how Google uses atomic clock and GPS for Spanner [1]

Google: "“We can commit data at two different locations — say the West Coast
[of the United States] and Europe — and still have some agreed upon ordering
between them,” Fikes says, “So, if the West Coast write happens first and then
the one in Europe happens, the whole system knows that — and there’s no
possibility of them being viewed in a different order.”"

Renaissance Technology: "Replete with schematic drawings, the filing describes
a novel way for “executing synchronized trades in multiple exchanges.” The
invention consists of not only sophisticated algorithms and a host of computer
servers, but atomic clocks -- precisely calibrated to vibrations of irradiated
cesium atoms -- to sync orders to within a few billionths of a second."

To translate what Renaissance is doing in technical parallel, they are trying
to do a synchronous commit at multiple locations/exchanges at the same time.
Submitting a trade to an exchange can be viewed similarly to committing data
to a data center. By using atomic clock, synchronize these writes across
multiple locations in effect eliminating HFT from jumping in.

If anyone is looking into prior art on this, Spanner is probably the closest I
can think of. (I am not a patent attorney and don't want to turn this into a
patent debate).

[1] [http://www.theverge.com/2012/11/26/3692392/google-spanner-
at...](http://www.theverge.com/2012/11/26/3692392/google-spanner-atomic-
clocks-GPS)

~~~
ovi256
Generally speaking, as I'm not a patent lawyer either, the same technique
applied to two different problem domains can generate two valid patents. The
historical example is ship and automobile windscreen wiper.

~~~
yandie
But they're both in the software domain.

Not to argue with you, but I don't see the problem any different from trying
to synchronize two commits in a database. The same technique is not limited to
Spanner or algorithmic trading, but other fields as well. It's not so much
different from DHT or other algorithms, which have applications in multiple
domains.

~~~
toong
Isn't _software domain_ too broad ?

You could argue ships and automobiles are in the same transportation-domain ?

~~~
shiggerino
In a sane world wiping liquids off of smooth, hard surfaces would be the same
domain whether the material under whatever the wiper is attached to is in the
liquid, solid or gaseous phase.

------
nsedlet
A few weird things stand out to me: (1) Renaissance is super secretive. If
they want to use this strategy to make money, a patent reveals to competitors
what they're doing and creates more issues than it seems to resolve. (2)
Renaissance is an HFT firm. Why are they interested in thwarting HFT? (3) This
really isn't that fancy an idea. It's fairly general: send orders ahead to co-
located servers to be executed at specific times.

I wonder if what they're really trying to do is prevent banks or others from
creating anti-HFT infrastructure, and then providing it as a service to market
participants that want to place large orders. The patent would perhaps provide
some protection in that case.

~~~
darawk
Renaissance is not that type of hft firm. Renaissance uses algorithms to
predict price movements before they happen. The type of hft this system is
designed to prevent is front-running. Which is me seeing your order on
exchange A and buying ahead of you on exchange B before your order arrives.

Those types of hft firms are surely eating into Renaissance's profits in a big
way.

~~~
harryh
It's worth nothing that eating into Renaissance's profits in this way is good
for everyone else because it means that accurate prices are reaching the
market faster.

~~~
darawk
You could say the same thing about insider trading. So, the argument that
accurate prices reach the market faster is not, in and of itself, an argument
that something is good.

~~~
eru
Why? He can argue that insider trading is good. Which is actually a pretty
easy argument to make.

(And places like Germany only recently tightened laws against it.)

~~~
darawk
What is your argument that insider trading is good?

~~~
kasey_junk
I don't know how I feel about it, but several relatively common arguments in
favor of it are:

1) speeds up price discovery 2) makes complying with regulation cheaper 3) it
is nearly impossible to enforce currently

Some op-ed pieces arguing for it.

[http://www.marketwatch.com/story/why-insider-trading-
should-...](http://www.marketwatch.com/story/why-insider-trading-should-be-
legal-2011-05-17)

[http://www.forbes.com/sites/jeffreydorfman/2015/03/22/a-mode...](http://www.forbes.com/sites/jeffreydorfman/2015/03/22/a-modern-
insider-trading-law-would-recognize-the-victims-of-current-law/#6ab092376d0c)

[https://www.washingtonpost.com/news/wonk/wp/2013/07/26/insid...](https://www.washingtonpost.com/news/wonk/wp/2013/07/26/insider-
trading-makes-us-richer-better-informed-and-could-prevent-corporate-scandals-
legalize-it/)

~~~
eru
Yes, that's along the lines I would be arguing.

I am on the fence myself, not having thought about the matter too much.
Instinctively, I'd say insider trading should be handled as a breach of
contract (ie if I trade on something that I signed an NDA for), not as a
criminal matter.

------
1024core
> its flagship Medallion Fund generate[d] average annual returns of 71.8
> percent, before fees, from 1994 through mid-2014.

Jeezus. That is about the same OOM as Moore's Law.

~~~
HillaryBriss
thanks for noticing/commenting on that return rate. humongous. i'm surprised
no one else has mentioned it in the comments.

for comparison, according to one source, over 50 years, Berkshire Hathaway
grew at about 21 - 22%

[http://fortune.com/2015/02/28/berkshire-
after-50-years/](http://fortune.com/2015/02/28/berkshire-after-50-years/)

~~~
mikeyouse
Renaissance also reportedly charges a 5% / 44% fee instead of the standard 2%
/ 20%.

Quick math (which is wrong since they've changed their fee structure) -- If
you had invested $1M with Renaissance in 1994, using a 5/44, you'd end up with
something like $411M in 2014. Ren. would've made about $430M.

------
oli5679
If anyone hasn't already read Chris Stucchio's explanation of market-
making/HFT, this is well worth a read.

[https://www.chrisstucchio.com/blog/2012/hft_apology.html](https://www.chrisstucchio.com/blog/2012/hft_apology.html)

[https://www.chrisstucchio.com/blog/2012/hft_apology2.html](https://www.chrisstucchio.com/blog/2012/hft_apology2.html)

[https://www.chrisstucchio.com/blog/2014/how_to_not_get_rippe...](https://www.chrisstucchio.com/blog/2014/how_to_not_get_ripped_off_by_hft.html)

A basic summary is that market-makers add liquidity to the market and profit
from their bid-ask spread, increasing the execution-speed and depth of the
market. Many of the 'predatory' pricing strategies attributed to them by Lewis
and others appear to be impossible when you try and write down the pseudo-code
+ order book that corresponds to the allegation.

------
inthewoods
RenTec's Medallion Fund has obviously done amazingly well - almost to the
point where one wonders how it is even remotely possible. But their other
funds have had more average performance. Maybe this move isn't about Medallion
at all - maybe it about getting to better execution for their other funds in
order to improve returns.

------
mst
So, in theory, you get perfectly timed execution.

This assumes you're willing to trust their software and hardware.

I suspect they're right that this is a far more effective and comprehensive
approach than IEX.

I think IEX is going to nail them to the wall because their target market
understands and trusts a giant ball of cables having a particular length, but
can achieve neither when faced with a giant ball of computer science.

Other than the first sentence, this comment was about potential customer
response; I don't have an educated opinion about how trustworthy and/or
effective any given exchange software is.

~~~
dsl
They don't care about "target markets" or what anyone else thinks. This
technology is to protect their own trades.

The goal is to be able to execute buys across multiple exchanges (because the
orders are so large) without other high frequency firms being able to see a
trade on one exchange, then buy and resell stock to them at a higher price on
another exchange.

~~~
kasey_junk
> without other high frequency firms being able to see a trade on one
> exchange, then buy and resell stock to them at a higher price on another
> exchange

This is a pretty common misconception of how latency arbitrage works. In
reality the other HFT are not buying/selling new orders. Instead what they are
doing is cancelling or modifying their existing orders so that they don't get
hit by incoming orders.

HFT firms can have orders that have been resting for a very long time
(days/weeks depending on the exchanges/risk rules) and you will never be able
to get an order now in front of an order from last week, no matter how fast
you are.

~~~
Animats
_" In reality the other HFT are not buying/selling new orders. Instead what
they are doing is cancelling or modifying their existing orders so that they
don't get hit by incoming orders."_

Right. One of the strategies is:

\- Put in standing order to sell a small amount of security slightly below
market and leave it active.

\- Wait until a buy order triggers it.

\- Buy same security faster than rest of buy order can be processed.

\- Sell security just bought at higher price.

\- Profit.

There are lots of variations on this, but that's the basic idea. It has the
profitability of front-running, but is legal.

~~~
yummyfajitas
You haven't even described a strategy. Guess what, I made a bunch of money off
brexit by buying low and selling high!

Consider the alternative way this "strategy" can go:

\- Put in a standing order to sell a small amount slightly below market.

\- Wait until you receive a "TRADE CONFIRMATION 100@$10" message.

\- Buy a lot of same security very fast and put in a sell order at higher
price.

\- No one actually buys it.

\- Loss

This is actually a very risky strategy and very few people do it.

What's actually happening most of the time is a far less risky one:

\- Put in standing order SELL 100@$10, 100@$10.05, 100@$10.10

\- When you receive TRADE CONFIRMAtiON @ $10, cancel other orders and reprice
higher (maybe $10.20 and $10.30).

\- Maybe put prices back if you don't get filled in an hour.

The goal here is to offer a good price $10.00 to Joe Sixpack (no delta
toxicity), but to offer a worse price to Bill Ackman (high delta toxicity).

~~~
mrchicity
This strategy could work, but only on exchanges where your own private trade
confirmations are faster than the public quote broadcasts, and only if you can
use the information to aggressively trade a different, but highly correlated
security.

------
hiou
So one of the most famous HFTs is now going to offer a way to block the damage
done by HFTs?

Despite the hilarity of such a thing, is this a sign that HFT is not nearly as
profitable as it once was?

~~~
kasey_junk
Profits in HFT have always been oversold. These days the margins are brutally
competitive.

That said I have no idea why they would patent this. I can't see how they can
make money from it.

~~~
andyjdavis
If nothing else, it could just be to stop anyone else from patenting something
similar then trying to use that patent against them.

------
jwatte
An exchange could work just as well and provide just as much liquidity if it
accepted sealed bids into a queue for one minute, then settled and showed the
full queue, while accepting sealed bids for the next minute. HFT would no
longer be a thing, and everyone would trade on more equal footing.

("One minute" is a guess. Could be right interval is 20 seconds or ten minutes
or whatever... But needs to be slow enough to allow full dissemination and
reasonable time for sealed bids.)

~~~
MichaelGG
There are exchanges that operate with similar rules, like POSIT.
[http://www.itg.com/product/posit-3/](http://www.itg.com/product/posit-3/) But
the slowness is a lot more, executing a few times a day. And you can't change
your order AFAIK (and there's large random timespans). There's also
complications to avoid revealing how big the buy or sell side are.

As far as your suggestion, that's what I was thinking for a while when I first
read about them. I don't think it works. Simply cutting over every minute
doesn't help, since there'd be a race near the edge. Like eBay, there's zero
point in submitting a bid until the very last (milli|micro|nano)second.

It also doesn't work because other exchanges exist. For instance, suppose the
interval is an hour. You submit at 0:01, then by 0:30 the price has moved on
other exchanges. Obviously you'll want to change your order, and you still
have time. But the price is changing on other marketplaces every nanosecond,
so you're going to be changing your bids right up until 0:59.999999. Once you
allow changing the order, you're back to racing.

If this was the only exchange type, and they all were synchronized, it might
work a bit better. But you'd run into another issue: no one would submit an
order until the very last microsecond, to use all available information.
There's probably more complications too; I don't really know anything about
this stuff.

HFT isn't a bad thing, or at least, I've not heard why it's actually bad.
Other than runaway programs screwing things up. Which, I think is actually
great. That big flash crash was fucking hilarious. People had sell orders in
at 0.01 or market or whatever, and they executed, then they got all upset that
things worked like they should!

~~~
eru
HFT is only a bad thing, because it's removes bright minds from working on
other problems; not because it hurts other market participants (which it
doesn't---apart from being competition to other market makers).

I've read some interesting proposal that removing the subpenny rule would make
speed less of a concern, since it would be possible to undercut on price
instead.

See
[https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...](https://www.chrisstucchio.com/blog/2012/hft_whats_broken.html)

~~~
andylei
a lot more bright minds are working on making you click on ads than hft

~~~
eru
Two wrongs don't make a right.

------
kazinator
Atomic clocks? You can beat high-speed traders by only settling transactions,
say, every five minutes. Whenever the time is nn:n5:00, look at the roster of
orders and match bids with asks. Make it a complete black-box; no information
is available about the current orders, only those from the previous five-
minute period.

------
jsingleton
Atomic clocks have been in use in capital markets for a while. I was at
National Physical Laboratory recently and they were demonstrating how they
pipe their atomic clock output to the traders / exchanges.

[http://www.npl.co.uk/commercial-services/products-and-
servic...](http://www.npl.co.uk/commercial-services/products-and-
services/npltime/)

------
beezle
There is nothing patentable in their application. All is obvious, not novel or
has prior art.

Case in point: gang switch in the era of voice brokers. Nothing says
'synchronized' execution better which is all this application is.

------
known
Isn't
[https://en.m.wikipedia.org/wiki/Information_asymmetry#Advers...](https://en.m.wikipedia.org/wiki/Information_asymmetry#Adverse_selection)
better?

------
dkersten
So, when can we expect Amazon Elastic Atomic Clock (AWS EAC)? ;-)

~~~
sseveran
I talked to a company recently that is working with Amazon to make a PTP feed
available in EC2.

------
chflags
Does RT still use mrsync? Great program.

------
zouhair
It seems I am the only one out here that thinks computer based trading should
be illegal.

~~~
hourislate
HFT systems scalp. They make their millions .001 at a time on front running
and volume.

A way to discourage this is by adding a very small fee to each trade. This
eats/takes away their profits.

The problem is their are too many folks making money that are connected to the
right people in Government.There will always be talk about doing something
about it but nothing will ever happen.

The only positive outcome from all this is that it created an arms race in the
industry when it comes to the technologies used to facilitate HFT or fight it.

Now whether that technology trickles down to the rest of us through new and
interesting things remains to be seen.

~~~
djoldman
If you wanted to kill HFT, it's actually pretty easy. Just make the minimum
increment incredibly small. In other words, let people trade at $.0000000001
increments. No fees needed.

~~~
mrchicity
The idea you suggest already exits for stocks in the US with very high prices
because the minimum increment doesn't scale with stock price. For example,
Google is $700 a share, making the minimum $0.01 price tick equivalent to
0.0014% vs. 0.08% for a $15 stock like Bank of America. HFTs generally don't
even bother with stocks like Google because they aren't profitable enough. The
rebate and value of making a tick goes down as price increases. This causes
spreads to widen and these stocks are generally harder to trade for the buy-
side. Not a good situation.

------
Lagged2Death
When HFT was new, amateur forums that discussed it (like this one) were full
of apologists saying that it didn't matter, it somehow didn't really effect
the market. Some even claimed it made the market better.

The tone of the conversation, the framing assumptions, seem different now.

~~~
pas
It still doesn't matter much (it helps with price discovery, as HFT
participants provide smaller spreads than traditional market makers, which
helps with liquidity, and the volatility they add in case they withdraw from
the market doesn't seem problematic, because when they withdraw they do so in
order to prevent trading in very non-understood regimes, so they don't trade
in chaos, wow, blame them, and/or ban them, but you lose the much greater
benefit too).

And yes, it's different, because when HN was new its comments were a lot more
precise and fact-based, now it's full of dogmatic luddites.

------
WestCoastJustin
Highly recommend reading Flash Boys [1] and it explains why time is so
important and HFT firms. Great book for filling in the picture of what HFT is
and I found it pretty entertaining too.

[1] [https://www.amazon.ca/Flash-Boys-Michael-
Lewis/dp/0393244660](https://www.amazon.ca/Flash-Boys-Michael-
Lewis/dp/0393244660)

~~~
harryh
Highly recommend reading Flash Boys: Not So Fast [1] and it explains how Flash
Boys gets it almost entirely wrong.

[1] [https://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-...](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-
Frequency-ebook/dp/B00P0QI2M2)

~~~
bpchaps
_comment was entirely irrelevant - deleting_

~~~
pgwhalen
Dark Pools isn't by Michael Lewis, it's by Scott Patterson.

~~~
bpchaps
Huh. You're right. Wonder where that impression came from, then..

~~~
pgwhalen
I'm about 90% sure that Lewis mentions it in his "acknowledgements" in Flash
Boys, as a great resource to go more in depth (which is why I ended up reading
it). You might have made that association.

~~~
bpchaps
Maybe. When it came out, everybody was talking about the two in an almost
identical light. That probably didn't help, either :)

------
cloudjacker
Interesting but remember when high frequency trading was news like 8 years
ago?

