
A Gazillion-Dollar Standoff over Two High-Frequency Trading Towers - jakub_g
https://www.bloombergquint.com/bq-blue-exclusive/the-gazillion-dollar-standoff-over-two-high-frequency-trading-towers
======
lordnacho
I was working in HFT myself, though in Europe, and I asked around about this.
Specifically WTF do they do with this line from Chicago to New York that's so
insanely important?

The US market has this interesting phenomenon that the futures trade in
Chicago, but the single stocks trade in New York. For those who are not
familiar, this means you can make a bet on the S&P 500 index as a whole in
Chicago by buying or selling futures. But if you wanted to replicate the
basket, you would go to New York.

Naturally there's a relationship between the two. If the futures are going
down, the prices of all the stocks needs to be adjusted. And if you look at
stock prices, it turns out quite a lot of any stock price is simply exposure
to the market at large. So you really want to know as soon as possible if the
market is moving.

Now you might have thought that the index is the index of shares, which is in
NYC, so why does it matter what Chicago thinks? Well actually the tail wags
the dog in this case. The futures are how people express a view on which way
the index is going, and you want to know that view immediately.

How does it actually work? Variants on "if the market goes down, pull all your
bid orders". Basically if things are fine you are happy to look at queue
position and imbalance as an indicator of whether you want to leave orders to
capture spread with. But the moment there's an indication from Chicago that
the market is dipping, you forget that and pull your orders. Or if you're
really fast dump a sell order on the guy behind you in the queue.

There's a huge amount of stock trading in NY each day, so it's worth your
while to have this line that you use to send the warnings down.

~~~
nodesocket
Thanks for this explanation. I previously thought the distance fight was over
being closest to the NASDAQ co-location building in New York, not connecting
Chicago and New York.

I am still not clear why microwave is faster than fiber though. Is it simply
that the fiber lines are multi-tenant, so there is not a direct hop?

~~~
wereHamster
Microwave signals travel from the transmitter to the receiver in a straight
line. Whereas light bounces off the walls of the fibre optics cable, which
increases the distance. Furthermore, the material that fibre optics are made
out of attenuates the signal much stronger than air, so you have to place more
repeaters and electronics in between your endpoints.

~~~
packet_nerd
> light bounces off the walls of the fibre optics cable

This is true of multimode fibre, but not single mode. Long haul communications
cables are single mode.

[https://en.wikipedia.org/wiki/Single-
mode_optical_fiber](https://en.wikipedia.org/wiki/Single-mode_optical_fiber)

~~~
Denvercoder9
Even for multimode fiber it's a huge simplification of the actual physics. The
actual cause of the speed difference, for both single and multimode fibers, is
the index of refraction of glass.

------
themagician
Can someone explain to me the purpose of HFT? Not the economic incentive, I
get that, but what does it accomplish? Is it a net benefit to the system? If
we arbitrarily limited transactions to human speed would there be some kind of
systemwide downside? Are there any good, human readable papers on the benefits
of HFT?

~~~
nradov
In theory the liquidity created by HFT lowers the cost of capital and
increases economic growth. Whether it creates a net benefit relative to the
profits it sucks out of the system is unknown. It would be quite difficult to
obtain the data necessary to make that calculation, and all of the second-
order effects would be complex to model.

~~~
vostok
I think that a good way to estimate the benefit would be to compare how much
less money HFT sucks out of the system than its predecessors.

~~~
nradov
Lots of other things have also changed since then. It's impossible to isolate
the independent variables.

------
smallnamespace
I don't know when we'll have practical long-distance neutrino transmitters
[1], but I'll bet someday the implementation will be bankrolled by HFT firms.

Why go around the Earth when you can go straight through it?

[1] [https://phys.org/news/2012-03-wireless-message-
neutrinos.htm...](https://phys.org/news/2012-03-wireless-message-
neutrinos.html)

~~~
endofcapital
I think when we get into cool near sci fi stuff we'll have faster than light
communication pretty soon with quantum entanglement effects, which should be
way easier to wrangle than neutrinos.

~~~
kch01
Quantum entanglement cannot transmit information faster than light unless
contemporary physics is very very wrong.

Neutrinos may be hard to use but they at least known to be physically
possible.

------
QuackingJimbo
I work in HFT as a quant dev

I am proud of my work and find HFT to be an interesting intersection of
computer science, math, game theory, economics, and psychology

As far as the societal benefit of HFT, I think that it is neutral. It doesn't
hurt anybody. It might even help a little bit (liquidity and tight spreads
save people a little money and maybe spur some economic growth).

However, this particular aspect (the physical latency war) makes me literally
sick to my stomach. I hate reading about it and I hate thinking about it. It's
like -- what are we even doing here guys?

~~~
elgenie
It's only neutral (at best) if you don't consider opportunity cost. Is the
best way for the country/society/humanity to deploy a bunch of smart people
with a decade and a half of education truly an attempt to try to cheat the
speed of light? If trades took 2x as long to execute as they currently do,
what exactly would be the harm?

~~~
t1lthesky
Even supposing that HFT adds no value to society (which is an incorrect
assumption as many commenters have already pointed out), this particular
argument is pretty inane in my opinion.

There are perhaps 4-8 significant players in the HFT space, all employing
anywhere between a few hundred to a thousand people. Probably less than 5000
people total, and if you only include programmers and quants, maybe less than
2000. Google alone has 30000 programmers. How many of them are optimizing ads
for eyeballs vs “benefiting the country/society/humanity”? What about the
thousands of programmers making video games mechanics more addictive for
children? I think it’s silly to focus on one tiny industry, and demand that
those people should be working on things for the good of humanity, when the
fact is the vast majority of humans just work for their own livelihood. I
mean, what do you think 95% of the people in SV are doing? Not every company
is trying to cure cancer or explore space...

HFT is such a small, niche, industry, and also extremely productive per
employee relative to most other industries. (the primary reason for comp being
so higher). It replaced the thousands of manual traders that used to be
responsible for arbitrage and market making with automated robots,
dramatically increasing market efficiencies while reducing the amount of human
capital required to provide those services. I find all the virterol towards
hft from SV very puzzling, as it seems to exemplify all the things that SV
espouses!

------
human20190310
Location is everything. If trading firms are willing to spend money to
position their towers slightly closer to the trading endpoint, the town where
the endpoint is located should approve construction in geographic order,
allowing new towers to be constructed closer to the endpoint in a way that
maximizes tax revenue to the city.

Ideally this would keep a lot of tower-construction people continually
employed and paying taxes, building new towers ten meters in front of the old
ones every month or two.

------
tomalpha
Fun fact: New Line Networks mentioned in the article is named after the New
Line Tavern in Chicago [0]. Which is actually quite good. And might just
attract network engineers that work for HFT firms. Purely coincidentally.

[0] [https://www.newlinetavern.com](https://www.newlinetavern.com)

~~~
syedkarim
New Line Tavern is the only bar I've seen that has drink/food specials on
Friday and Saturday.

------
anfractuosity
This film seems relevant -
[https://www.imdb.com/title/tt6866224](https://www.imdb.com/title/tt6866224)
\- The Hummingbird Project (2018).

'A pair of high-frequency traders go up against their old boss in an effort to
make millions in a fiber-optic cable deal.' (It also seems to feature the
microwave based approach from the trailer).

------
chungleong
I wonder if a lot of money is going into research on "spooky action at a
distance".

------
ggm
I get that arbitrage helps set the price, but what does HFT do, beyond
deciding which of the competing nano-second enabled traders get to edge a
profit in an artifact of how information _flows_?

I don't see this HFT as being information-worthy arbitrage. I have an intent
to set a real-world price, I declare it, and in the increment of time it takes
my packets to flow, somebody edges in the queue and inserts trades to make me
have to deal with them for some increment of price. I wind up paying more, and
the original source winds up getting less, or some other event.

its like re-intermediation, in a world heading to dis-intermediation.

What is the real-world, wider economic "good" here? If my pension fund is
routinely profiting from this, I am not sure that is a wider good btw: We
could probably make more money selling Heroin, if we're going down this
'whatever it takes' track...

~~~
kasey_junk
> it takes my packets to flow, somebody edges in the queue and inserts trades
> to make me have to deal with them for some increment of price

This is the biggest mistake people make when talking about HFT. At no point in
time does someone see your order before it hits the exchange (unless you’ve
specifically agreed to trade that way & even then they are obligated by lots
of regulation to execute in particular ways to protect from that agency
problem).

No HFT is taking pennies from your order. If you send a limit order through
the book you will get filled at the best price available up to your limit.

~~~
ggm
Thanks for explaining. If they're just squeezing margin by being quicker, and
not intruding into my trade (I don't trade. this is clear I think, given how
ignorant I am) then I have less to worry about.

------
chrisco255
Oof, solid article but Bloomberg breaks the back button if you scroll past the
end of the article. It will load several new articles and push them onto the
nav stack, meanwhile it doesn't seem like I can click enough times to get back
to HN from there.

~~~
PhantomGremlin
Are you on mobile?

The article reads fine w/o JavaScript, desktop Firefox. And the back button
keeps working. I assume that's thanks to the absence of JavaScript, rather
than something special that Firefox is doing.

------
raviolo
Another example for people to appreciate what a small latency advantage means.
Consider SPX options which is a huge market. These “trade on CBOE” which is a
Chicago exchange - but they physically reside in NJ. Now consider SPX futures
- ES - on CME, physically in Aurora. Now imagine a 20-tick / 5-handle “sweep”
in the ES — “sweep” is instantaneous price move (either up or down). Not “very
fast” but exactly that - instantaneous. These happen as a result of large
incoming aggressor order taking out many book levels at once. Sweeps can be of
different magnitude (from just few ticks all the way to max allowed per CME’s
“velocity logic”) - but they happen all the time. If you know enough about
e.g. ES futures but have never seen sweeps, chances are you didn’t have access
to the right tools/platforms. Even some supposedly-professional-grade
platforms like TT or CQG do not show trade data with enough detailization to
see these.

Anyway... why is this important? Because immediately following the sweep in
e.g. ES, option prices in e.g. SPX options are temporarily way off. Dutch
market makers have not yet moved their options quotes, because they do not yet
know about the sweep - at least not in NJ. If you can somehow get orders to NJ
faster than market makers can cancel their option quotes, you can take out
_hundreds_ of mispriced options. Multiple expires, dozens of strike, puts and
calls. Very juicy bunch of stale quotes.

PnL... well that gets tricky. On one hand, just this one example is in theory
worth hundreds of million per year _if market did not respond_. But the market
will respond. That’s inevitable. No one enjoys being ripped off for too long,
so if they cannot defend they will either leave the market or set quotes wide
enough that they are never mispriced. The same goes for any other “latency
arbitrage” game. I always love how people throw numbers like “this is worth
X”, almost always assuming status quo. HFTs are very responsive to market
conditions. If I run a strategy that’s been making money every single day for
10 years and all of a sudden it starts losing - I press the pause button and
go do some serious analysis. So maybe I will let you have it for few hours -
but after that if I can’t compete I’m out. So it’s not that simple.

------
johnnycab
The dice is fully loaded in favour of HFT pioneers and incumbents, facilitated
by the ever-growing and nouveau riche (e.g. Zayo) Tier-1 ISP's, who control
most of the backhaul and dark fibre estate.

However, over the next few years, the advent of maturing ML frameworks,
coupled with the intensifying war and ratification of standards over 5G/IoT
based infrastructure, might prove to be serendipitous for nimble-footed
enterprises.

[https://en.wikipedia.org/wiki/Zayo_Group](https://en.wikipedia.org/wiki/Zayo_Group)

~~~
mattrp
Highly unlikely that 5g / iOS will play a role in the context of hft. Also
your view of the ecosystem (eg zayo and co being the big winners) is massively
outdated by five years at minimum.

------
tlrobinson
The use of wireless communication in high frequency trading begs the question:
how much could a malicious actor profit from momentarily jamming that CyrusOne
(or similar) tower?

------
lolc
I'm largely ignorant of HFT but I often wonder what the benefit of it is. It
sounds like a huge zero-sum game to me.

In my (probably simplistic) view, exchanges could publish and process orders
at long intervals (seconds, minutes, hours?) then add a jitter of several
intervals to incoming orders, with cumulating jitter for cancels. That would
require traders to look beyond one interval when trading.

~~~
kasey_junk
Traders already look beyond one interval. An order I put in yesterday that
took 5 minutes to execute still beats an order I put in today in 10
nanoseconds.

Being fast is important for cancels & risk management. Which answers the
question on what it provides. It lowers the risk for the traders allowing them
to price tighter.

~~~
lolc
But lowering the risk can only happen at the expense of other traders. So
overall there is no lowering of risk. HFT is just increasing the cost of
market participation for other traders. Because they pay the profits of the
HFT traders.

~~~
kasey_junk
No. We can objectively show that is untrue. The risk for HFT (especially
market makers who are most sensitive to latency) is priced via the bid/ask
spread. That is smaller than it’s ever been and would be smaller still on many
symbols if minimum price of ticks was lowered.

~~~
lolc
I don't understand why I should care about the risk to HFT traders because I
don't see why they should exist in the first place. So I don't understand your
argument.

For HFT traders to make a profit, somebody else must lose. In my
understanding, the ones to lose are the other traders. If I want to buy
shares, part of the price of buying them will go to HFT traders. And my
revenue of selling them will be lower due to HFT traders on the exchange.

~~~
kasey_junk
One of the biggest classes of "HFT" is automated market making. These
participants have long existed in trading environments and are there to bridge
the gap in time (you want to buy now, but no one wants to sell) and space (you
buy on exchange a, but the participant that wants to sell is on exchange b).

Market makers take on the risk bridging those 2 areas. They hold positions for
short periods, with the hope of making money when a new participant enters the
market. They lose money when they are holding positions that the market goes
against. To account for that, they price their risk into what they are
offering you. The less risk they take on, the better price they can offer you.

If you want to buy shares _right now_ you are going to pay someone for the
privilege. Modern HFT are offering that service cheaper than any other
implementation before.

~~~
lolc
Ok thanks for the explanation. I still don't see what benefit I could get from
buying shares right now as opposed to a few seconds later. Why should I pay
for that?

~~~
kasey_junk
If you don't cross the book (ie offer more than the lowest bid or vice versa)
the you _become_ a market maker (though not much of one). You don't pay anyone
to do this. But because of the HFT/Market Makers you get the benefit of
dramatically lower trading fees.

So you _don 't_ pay for it in that case, but you still get a benefit.

------
soheil
I did the math to use the neutrino transmitter it'd be 0.13% faster to
transmit information from Chicago to NYC. Using equations:

s = r(theta)

l = (2r)sin(thea/2)

s: arc length (air travel distance 714 miles)

r: radius of earth (3,958.8 miles)

theta: arc angle

l: length of cord (straight line under arc)

(s-l)/l * 100 gives the % increased difference in length

~~~
PhantomGremlin
You need to add a little extra time to the microwave route because microwaves
are line of sight. The signal needs to be detected and re-amplified multiple
times along the way. How much extra time? I don't know, I'm not an RF guy,
maybe someone can chime in and tell us how much latency each amplifier adds.

The neutrino route only needs a single detector at the very end, nothing along
the way.

------
drexlspivey
If you want to know how HFT works I recommend the book Flash Boys by Michael
Lews or the first 15 minutes of this talk by Brad Katsuyama (the book
protagonist)
[https://www.youtube.com/watch?v=N9hoqFpDjVs](https://www.youtube.com/watch?v=N9hoqFpDjVs).

In short, when you send an order from your computer to buy say 10000 stocks,
this order gets split to all the multiple exchanges. When the order hits the
first (closest) exchange, HF Traders will pick that up and race you to the
rest of the exchanges and try to front run you by buying the stock in lower
price if available and make an offer to your bid price that they know is
coming.

~~~
tptacek
Flash Boys is terrible (it's not even good as a book --- and I'm an avid fan
of Michael Lewis's). It's embarrassingly bad on the technical details.

I like "Flash Boys: Not So Fast" as a corrective.

A much better book, from another HFT skeptic, is "Dark Pools".

The example you provide (of basic, naive latency arbitrage) matters for
trading desks at giant investment banks. They make their money in part by
selling execution services to giant holders of stock. Major trades by these
people (big "blocks" being "shopped") are tradable market news. The giant
holders of stock would prefer it if the news didn't get out until after their
orders were filled. That's a service people like Katsuyama used to be able to
offer his wealthy clients with very little effort on his part. That service
has since been automated away, and it bothers him. I guess I'd be bothered
too, but I'm not sure why it's moral dilemma.

Front running isn't a technical problem and it has little to do with how fast
traders are. It's an agency problem: a broker "front-runs" their client when
they receive an order from that client and make proprietary trades against and
ahead of it. Random people in the markets don't have an agency relationship
with other traders and are under no obligation to avoid competing with them.

~~~
integrate-this
I was an engineer for a high frequency trading desk at a firm not mentioned in
this article.

Flash Boys is a great book and we required our new hires to read it as it got
a lot of things right.

Front running is illegal now, but arbitrage opportunities still exist between
exchanges. Being fast is still an easy way to make money.

You're right about dark pools though. Those are the future (honestly they are
already up and functioning) and they hide trading activity very well.

~~~
tptacek
This is kind of a series of non-sequiturs.

Front running has always been illegal.

Arbitrage is not illegal. Latency arb certainly isn't easy.

"Dark Pools" is a book. It's also a thing, but that's obviously not what I was
talking about.

There's nothing especially shady about dark pools. We'd call them "private
exchanges" if the exchanges weren't themselves already private companies, I
think.

~~~
integrate-this
Front running has not always been illegal, front-running if you have a
fiduciary duty to clients has always been illegal, and many forms of front
running are still legal today.

Nowhere did I imply that arbitrage is illegal and latency arbitrage is a big
driver of revenue for several hedge funds, especially those which track
baskets against their components.

There isn't anything shady about dark pools, except that there is little
public information about the trades which take place within them, they are
sparsely regulated, and you have even less insight into your counter parties
than you do on open exchanges. And my response referencing dark pools was a
response to your comment about execution services.

~~~
tptacek
Front-running has been illegal (under that name) since 1987, long before the
full automation of trading. Again: front-running involves an agency
relationship; by law, you're not "front running" simply by beating a part of
someone's block trade to an exchange.

------
mattrp
Follow @sniperinmahwah if he is still active... everything else is stuff
that’s been known for quite some time.

------
pkaye
Could they not just make one tower a few feet higher than the other?

------
snek
Why don't the rich people just move to New York?

------
freshcatch_
Capitalism is just so absurd.

