Hft how fast

Close drawer menu Financial Times International Edition. Search the FT Search. World Show more World. US Show more US. Companies Show more Companies. Markets Show more Markets. That wouldn't surprise many people who remember what happened to the stock market on May 6, at p.

How did the Flash Crash happen? Some accounts, such as the report by the U. As liquidity ran out, the value of the contract plunged. High-frequency traders piled on, dumping the e-mini and and selling off other stocks, causing the rapid decline to cascade through the stock market. See here for a minute-by-minute timeline of the crash.

Another account of the crash from the market-data firm Nanex, however, focuses on two problems with price quotes, or when market participants send in the prices at which they want to buy or sell. During the Flash Crash, transmission of these quotes slowed sharply, as exchanges became overloaded.

What caused the overloading, Nanex argues, was "quote stuffing" — high-frequency traders that sent in a blizzard of orders to buy and sell at the same time, only to cancel those orders milliseconds later before they went through.

This behavior paralyzed market trading, and the processing delays caused a panic among traders who knew they had unreliable data. A related theory is that markets froze up and crashed because of what's called "order flow toxicity," a complicated way of saying that people in the market became convinced that the other parties in their trades were "informed," or had newer or better information than they did.

The market crashed as traders chose to dump shares or withdraw from the market rather than lose money to an informed trader. In this view, the problem with high-frequency trading is adverse selection : the fast traders drive out the slow until no market is left. Until last summer, the data firm Thomson Reuters, for example, sold to elite investors the right to see an important economic statistic, the University of Michigan's consumer confidence survey, five minutes earlier than the rest of the market.

An "even-more elite" group of high-frequency trading clients could purchase an extra millisecond head start. Reuters isn't doing this any longer. Yet similar practices still exist - one is called " paying for order flow. Why would these firms pay for that? Because they get to see orders to buy and sell before anyone else, giving them milliseconds' worth of advance knowledge of future prices. A similar example that Lewis talks about is "co-location.

This gives them the first look at price changes. If these orders are all filled instantly, the high-frequency trader can infer that on the other side of the trade is a big investor looking to move a large volume of shares.

The high-frequency trader then takes this knowledge and uses it against the big investor by moving the price against him - buying if he wants to buy and then selling it back to him at a higher price, selling if he wants to sell and then buying it back at a lower one. If the other traders fall for it, the algorithm quickly reverses course to take the side of the trade it actually wanted. There's evidence that this is what trading algorithms sending in bizarre orders, as they did during the Flash Crash, might be up to.

High-frequency trading is a zero-sum game. The winning side wins whatever the losing side loses. Yet millions of dollars have been spent to play this game faster - laying shorter cables across the country to transmit trades, massive investments in trading programs, and so on. One idea is to tax financial transactions, a proposal called a Tobin tax , after economist James Tobin. A slight fee of, say, 0. Yet it might render unprofitable most of high-frequency trading, which makes a small profit per trade but makes countless trades.

The European Union planned to introduce a Tobin tax in on stocks, bonds, and derivatives trading, but the proposal has since been stalled. Sweden had a 0. Deepfake researchers have long feared the day this would arrive. By Karen Hao archive page. By Will Douglas Heaven archive page. They show how intelligence and body plans are closely linked—and could unlock AI for robots.

Stay connected Illustration by Rose Wong. Enter your email. In other words, shaving milliseconds off the time it takes to transmit information between financial corridors could result in millions in profits. One of the most important financial routes is the one from Chicago to New York, which is why I used it as an example.

For over years, buy and sell orders were transmitted over copper cable, which zigzagged its way along rail lines. It took 0. Today, much of our information travels in beams of light through fiber optic cables.

Through these beams of light, that same Chicago to New York round-trip path takes only The straightest possible path between New York to Chicago is miles. But what could be faster than the speed of light through fiber optic cables? Well, it turns out that the speed of light in glass — fiber optics — is much slower than the speed of light through the air.

Light, an electromagnetic wave, can travel at , kilometers per second in a vacuum, and nearly that quickly through the air. Light, however, can only travel at about , kilometers per second in even the clearest glass. To simplify, it takes light 1. With that knowledge, companies began investing millions into microwave transmitters, setting up chains of microwave dishes between financial-market data centers. These microwave transmitters meant that a round-trip from New York to Chicago could now be cut down to 8.

Several companies have now begun to use millimeter waves, which offer a shorter wavelength and can carry even more information than standard microwave transmissions. Today, companies are still trying to shave off every millisecond possible between the two major financial hubs. Based on the speed of light, the theoretical limit for sending information between New York and Chicago is 7.

High-frequency traders HFT can only profit if real investors — human investors — are buying and selling stock because they are essentially arbitraging our trades. What these HFTs also do is compete with one another. One could call it legal market manipulation, since:. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock.

They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions. Securities and Exchange Commission.

If a human investor did the same thing, he would be violating securities regulations and would be subject to various civil and criminal sanctions. What do you think of HFT strategies and their advantages over the retail investor? Should they be allowed to do what they do? All they see are numbers.

In other words, the value of our markets could soon, or may already, be represented by unrealistic valuations generated by robots.