> My personal pet theory (for some of the graphs) is that someone is just loading up the book at many price levels with unlikely-to-be-filled limit orders to gain priority (for the rare occasions the market makes big swings).
Only works if big swings deviate from intrinsic value of the stock. Let's say a biotech stock fails its FDA panel and drops like a rock, its fair-value suddenly drops from $8 to $2; your 100 limit buy orders at $6 suddenly gets hit and you'll have to sell them at $2/share.
> Some other graphs have perfectly innocuous explanations - for example someone probing the depth of the book or filling a big order piece-by-piece.
You probe the depth of the book by building the book not by submitting out of the money orders. You sell block order periodically over a day or days via VWAP by not revealing your true order size. Submitting a bunch of limit buy orders at once even if they are out of money, especially under the same MPID will reveal your hand and the size of the buy/sell interest.
> FWIW, you can't really pull a serious DoS against most exchanges. Most decent ones have pretty strict rolling-window rate limits.
The point is not DoS against exchange but to make your competitors process messages slower than you do. They can still process messages 15ms at a time, but you could do it at 10ms. In this game where everyone's colo'd to the exchange and have the same arbitrage algo, having a 5ft. cable to the exchange trading server vs. a 7ft. cable is a competitive advantage. The same case is with slowing your opponents' message processing rate down by 5ms.
having a 5ft. cable to the exchange trading server vs. a 7ft. cable is a competitive advantage
Incidentally, light travels this far in one clock cycle for a 2GHz processor. I have a feeling that the interrupt handling machinery and the network card and the Layer 2 and Layer 3 inefficiencies add more latency than two feet of Ethernet cable, though. (But I guess a pair of scissors is cheaper than a processor fab.)
The HFT world reminds me a lot of the audiophile world. Sure, two feet of Cat-5 cable introduces measurable latency. Sure, using 1% tolerance resistors instead of 0.001% tolerance resistors affects the performance of your amplifier.
Whether or not this makes any difference in the real world, though... nobody ever has the answer to that question.
having a 5ft. cable to the exchange trading server vs. a 7ft. cable is a competitive advantage. The same case is with slowing your opponents' message processing rate down by 5ms.
I get your point, but 5ft vs 7 ft cable isn't going to make any[1] difference.
[1] light travels 2 ft in 2.033 × 10-9 seconds. According to http://en.wikipedia.org/wiki/Memory_latency, A memory seek on DDR3-1600 takes 0.6 x 10-9, but reading one word takes around 10 x 10-9. Given the amount of processing needed to process a single packet, I cannot see anyway 2ft of network cable is significant.
Only works if big swings deviate from intrinsic value of the stock. Let's say a biotech stock fails its FDA panel and drops like a rock, its fair-value suddenly drops from $8 to $2; your 100 limit buy orders at $6 suddenly gets hit and you'll have to sell them at $2/share.
> Some other graphs have perfectly innocuous explanations - for example someone probing the depth of the book or filling a big order piece-by-piece.
You probe the depth of the book by building the book not by submitting out of the money orders. You sell block order periodically over a day or days via VWAP by not revealing your true order size. Submitting a bunch of limit buy orders at once even if they are out of money, especially under the same MPID will reveal your hand and the size of the buy/sell interest.
> FWIW, you can't really pull a serious DoS against most exchanges. Most decent ones have pretty strict rolling-window rate limits.
The point is not DoS against exchange but to make your competitors process messages slower than you do. They can still process messages 15ms at a time, but you could do it at 10ms. In this game where everyone's colo'd to the exchange and have the same arbitrage algo, having a 5ft. cable to the exchange trading server vs. a 7ft. cable is a competitive advantage. The same case is with slowing your opponents' message processing rate down by 5ms.