Remember that story we ran a few weeks back about the alleged theft of the Goldman-Sachs automated trading code?
Well, thanks to said case, Goldman-Sachs and the high-frequency automatic trading (HFT) practices that they dominate are increasingly sliding into the spotlight of Congressional scrutiny, so Ars Technica have knocked up a brief guide to what it’s all about. If you thought “the markets” were those guys in suits shouting at each other on the trading room floor, think again. [image by Coffee Maker]
If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for taking regular advantage of speed, location, and information to generate profits—are executed hundreds of times per second, billions of times per day. And the whole enterprise is mainly powered by the same hardware from Intel, AMD, and NVIDIA, that Ars readers use for gaming.
Only about three percent of the trading volume on the NYSE is actually carried out by means of traditional “open outcry” trading, where flesh-and-blood humans gather to buy and sell securities. The other 97 percent of NYSE trades are executed via electronic communication networks (ECNs), which, over the past ten years, have rapidly replaced trading floors as the main global venue for buying and selling every asset, derivative, and contract. So the ECNs are the markets in 2009, and those pit traders who pose for the cameras are mainly there for the cameras.
In other words, Josephine Average Stock-Trader is going head to head with supercomputers every time she dips a toe into the game. The ECN algorithms specialise in making millions of tiny trades, each making fractions of pennies of profit – small beer when considered in isolation, but big profits when scaled up to the sheer volume of transactions that these systems can handle.
It’s like a vast virtual ecosystem of predatory code-critters; go find out more about it. Know thy enemy, and all that.