

The Most Expensive Place To Put A Computer - lwc123
http://larrycheng.com/2009/09/16/the-most-expensive-commercial-real-estate-in-the-world-is-a-place-for-computers-not-people/

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mrshoe
These high frequency traders typify the harmful Wall St. attitude with which
America's twenty-somethings are enamored. It really needs to stop.

Let's compare business to football.

Some people become experts in training, coaching and playing football. Others
manage teams and learn how to spot talent and work with dynamics between
players to create winning combinations. They're trying to raise the bar and
increase the level of competition within the game.

Then there is a class of people who don't really add anything to the game, but
they want to profit off of it. These are the gamblers.

High frequency traders are like meta-meta-football players. They try to profit
off transactions _between the gamblers_.

Frankly, I don't know how they can look at themselves in the mirror. I wish
they would put their minds to good use and actually solve real problems
instead of meta ones.

~~~
bhousel
Your gamblers vs. players analogy doesn't really work. The high frequency
traders are playing the same game that traditional traders are playing. They
just pay for a bit of an advantage in how the game is played.

Whether or not this is an _unfair_ advantage is up for debate.

~~~
joezydeco
But gamblers can't put a large bet out there on the sportsbook floor and just
before an interception is caught declare "Whoops! That bet isn't valid
anymore".

~~~
agbell
Betfair has realtime sportbet trading

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nazgulnarsil
it seems like arbitrage is often presented as somewhat negative. floating
exchange rates between fungible commodities (and the arbitrage opportunities
that accompany them) are a feature not a bug. they allow markets to correct
for fluctuations in supply and demand very quickly ensuring more efficient
resource distribution.

arbitrage being available exclusively to a small group who also control
membership to their own group? corporatism, and obviously bad. this problem of
the financial world having insiders and outsiders has nothing to do with high
speed arbitrage, that's just an illustration of it.

~~~
andylei
actually, a lot of the best high frequency trading shops out there are small,
private, prop trading groups. for example, tower research capital
(<http://www.tower-research.com/>) is a pretty successful high frequency shop
that isn't a big bank. it was started from scratch by mark gorton, the guy who
created limewire. there are tons of high frequency shops making tons of money
who are just like this.

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hvs
The fact that server proximity plays are role in trading advantages seems...
wrong. I'm not sure that it matters, but I think most people have a general
aversion to gaming the system.

~~~
andylei
it's not really gaming the system. if you have money, you can buy server space
close to the exchange's computers. that may seem unfair, but that's not really
unique to trading. consider manufacturing: if you have more money, you can buy
a bigger factory and leverage economies of scale to make your widgets for
cheaper; that's a competitive advantage.

~~~
bhousel
It's a bit different. Your metaphorical factory isn't making cheaper widgets
by taking tiny pieces of your competitor's widgets away from them.

I'm not arguing for or against high frequency trading, just saying that
finance actually is a zero sum game unlike manufacturing.

~~~
fizx
Finance isn't zero-sum. Better finance makes market capital allocation more
efficient, which makes the pie bigger for everyone.

~~~
three14
I've never understood how this applies to arbitrage. Without arbitrage, the
parties to the transaction would capture the money lost to arbitrage, and in a
modern market, the same information would be learned. If I offer to sell 1000
at $3.03 and you offer to buy at $3.04, we can split the difference. If
someone else gets the information of that spread faster than we can resolve it
ourselves, they don't "lubricate the capital markets" or anything. They just
get our money.

~~~
besquared
Arbitrage supplies liquidity at all prices, including prices where most trades
might not otherwise occur. Liquidity is required for businesses to
systematically eliminate risk, therefore it is highly valued as a source of
stability for most companies who deal with financial instruments.

Knight has some thoughts on systematic risk in his book Risk, Uncertainty and
Profit.

~~~
three14
Did this answer my question? I'm really open to the possibility that it's just
me, but I still don't get it. I see that _some_ kinds of arbitrage could be
useful to a market.

I don't see how these microsecond-timing types of arbitrage can possibly help
_any_ market. Every last one of these trades will happen anyway. (*nitpicker's
corner - of course some wouldn't happen, e.g. at the precise close of
trading.)

~~~
tptacek
He did answer your question. The value of arbitrage is liquidity. Liquidity is
extremely valuable. Here, I'll quote Harris:

 _Liquidity is the ability to trade large size quickly, at low cost, when you
want to trade. It is the most important characteristic of well-functioning
markets._

 _Everyone likes liquidity. Traders like liquidity because it allows them to
implement their trading strategies cheaply. Exchanges like liquidity because
it attracts traders to their markets. Regulators like liquidity because liquid
markets are often less volatile than illiquid ones._

Market are not magical. Just because something may be fundamentally worth X
does not mean you can automatically find someone to take the other side of a
trade based on that valuation.

~~~
three14
I still don't get it. I accepted that liquidity is valuable. This specific
case adds no liquidity. None. Both sides are participating in the same market,
and have enough information to make the trade. They _will_ make the trade if
no one interferes. Someone else comes in as a MITM, and collects the spread.
What value did they add?

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mattmcknight
"When billions are made on millisecond-level trade throughput, having your
server right next to the server that executes your trade is worth a lot more
than $4,000 per square foot, it’s priceless."

It's actually not priceless. If the space is truly that valuable, the price
will keep rising to the point where the profitability decreases relative to
the risk. The risk inherent in this is also key. If you are buying and waiting
for the uptick, and then it goes down...

~~~
sam_in_nyc
While you're definitely correct, you should be aware of a literary device
called "hyperbole" :)

~~~
mattmcknight
Of course, but a key implication of the article and many of the responses was
that this was somehow unfair, in that connected companies had special access
to these spaces. In fact, if the ability to make billions were predicated so
highly on the precise location, people would likely be willing to pay quite a
bit more. If the advantage were that great, one would expect the price to be
higher.

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th0ma5
If they could all agree on a third-party timing and signing methodology, this
would be a non-issue in my opinion. Gaming it? Sure, but make the fines
insane, and use the actual timing (whatever it is) for auditing.

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newsdog
Ah, the cheat computers! Where they get a little peek at their opponent's card
before betting...

High frequency trading is cheating. Ban it.

~~~
shrughes
How do you to propose that? Put time limits between receiving information and
acting on it? This will just increase the arbitrage possibilities.

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mtraven
How important is physical proximity, really? An electrical signal can travel
186 miles in a millisecond. So locate the servers in cheaper real estate 10
miles away an you lose like about .1 millisecond round-trip. If that really
makes a difference in trading success something is really screwed up.

~~~
sam_in_nyc
>>How important is physical proximity, really?

First off, high frequency traders are making their money off of how quickly
they react to the market conditions. The quicker they react, the more money
they make. In this sense, if they trade at high enough volume, it's worth
paying more for a lower latency. This is, of course, assuming they are good at
what they do. If they are bad at what they do, a lower latency wouldn't harm.

Second, they are in a competitive environment. If they want to make money off
of obvious arbitrages that their competitors are likely engaged in as well
(very likely in the forex market), they need to react _first_.

I assume that physical proximity reduces latency in ways other than the time
it takes for photons to travel through fiber optic cable, for example router
hops.

>> On: Trading success based on latency

In Forex (the currency exchange), there are sometimes very obvious arbitrage
opportunities. You can take your Dollar, and trade it into Euros. Then, go
from Euros to Yen. Then, go from Yen back to Dollar -- and end up with more
dollars than you started with! Of course, after a certain amount of money
flows through, the market will adjust itself and the arbitrage will vanish.

Being the first to react to this arbitrage allows you to realize and profit
from the arbitrage before anybody else does.

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pchristensen
Worrying about how "high frequency traders" are making so much money is like
worrying about VCs making so much money. The best will make a lot, everyone
else will break even or lose money.

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mikeytown2
Answer: In orbit.

