Tag Archives: finance

Get up to speed on high-frequency trading

New York Stock Exchange buildingRemember 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If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for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.

32MB of code that’s worth billions is somewhere on the web

In what appears to be a very contemporary story of industrial espionage, we discover that 32MB of computer code could be the key to the success of one of the most powerful financial organisations on the face of the planet – and that someone may well have copied and uploaded it  for purposes unknown. [via SlashDot]

While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.

The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.

The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.

This is somewhat of a double bind for Goldman Sachs, as prosecuting the alleged theft will require them to reveal a certain amount of their business secrets at a time when people aren’t best disposed toward Wall Street profiteering. It also sheds a less than flattering light on the FBI’s investigative priorities:

What is probably most notable, in less than a month since Sergey’s departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases… especially those that allegedly involve Goldman Sachs.

I think this is going to be one of those stories that will grow with the telling, and Goldman Sachs are going to come out looking bad whether they win or lose the case. Couldn’t happen to a nicer bunch of people, AMIRITE?

Japan to ditch cash?

Japanese cashless payment systemWill the economic crisis hasten the arrival of the long-promised cashless society? It’s an idea that has legs – at least in Japan, where the government thinks getting rid of cash might make their economy easier to manage. [via Technovelgy; image courtesy Jan Chipchase]

Other extreme ideas mooted by the financial authorities include a tax on physical currency or introducing one to operate alongside the yen.

All three ideas are based on a theory concerning interest rates and the concept that a nominal rate of zero — as Japan has now lived with for much of the past decade — may be too high. In Japan’s case, the theory would suggest that nominal rates of -4 per cent might be closer to what is required to rescue the economy from another deflationary spiral. Having agreed that this might be necessary, the next question is how it could be imposed.

Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible. Richard Jerram, a senior economist with Macquarie bank, told investors that “the proposal has become practical with the broad penetration of electronic money and credit cards in Japan”.

He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.

I’m no economist, so I have no idea whether this idea is genuinely workable, nor what the side-effects might be. But surely, no matter how deep the penetration of electronic fund transfer systems may be, there’s going to be a demographic or two at the bottom of the stack who’ll suffer at the change-over…

… but then again, maybe not. Africa has taken to electronic money like a duck to water, and as mentioned before cash comes with its own hidden costs for the end user. Whether or not the reduction in costs created by abandoning cash would be passed on to the end user remains to be seen, but you’ll excuse me if I don’t hold my breath.

But here’s your science fictional brain exercise for the day: imagine you’re a drug addict living in a society with no cash. How do you buy your fix without the transaction being visible to the system?

Metaverse bank chairman does a runner with the cash

Starship screenshot from EVE OnlineYeah, so we’re all tired of hearing about crooks in charge of banks shafting their depositors and borrowers at the same time… but this story’s a little different, given that the bank in question exists in the virtual universe of science fiction MMO EVE Online.

That’s not to say no real money was involved, though; RMT, or Real Money Trading, is one of the few things frowned upon in EVE‘s laissez-faire economy, but it still takes place – and as such there may be a lesson for real-world economists in the story:

Because players often do not have the interstellar credits — abbreviated to ISK, also the official abbreviation of the Icelandic kroner — they need to expand their fleets, an enterprising player created a bank that would accept deposits and lend to players who would pledge assets, like their spacecraft, as collateral.

The bank was a success. According to its Web site (yes, it has one), Ebank accumulated about 8.9 trillion ISK in deposits in 13,000 accounts belonging to 6,000 users. That was far more than it was able to lend out — there were around 1 trillion ISK of loans.

Somewhere along the way Ebank’s top executive, who went by the online handle Ricdic, apparently got greedy. According to CCP, he made off with deposits, which he then sold for real cash to gamers on a sort of black-market exchange separate from Eve.

CCP kicked Ricdic out of the game. And Ebank has temporarily shut down while its board of directors (yes, it had one of those too) tries to sort out the mess. Depositors, meanwhile, appear to have pulled 5.5 trillion ISK of deposits.

It’s not clear how much of that virtual money was embezzled and now needs to be found, somehow, by Ebank. But if the Eve chatter is accurate, it could amount to 10 percent of deposits withdrawn. That could wipe out whatever capital was used to finance Ebank’s loan book. As in the real world, that would spell insolvency.

[…]

As in the real economy, the customers could be tempted to appeal to a higher authority — Eve’s creators. That would probably involve appealing to the Council of Stellar Management — a body of nine members chosen by Eve players to represent them in discussions with CCP.

But the word from Reykjavik isn’t likely to comfort Ebank’s depositors. Eve’s creators at CCP — which employs its own economist and philosopher — take a laissez-faire approach, leaving most such matters to the game’s users to sort out. Unlike the Icelandic government, which allowed three local banks to nearly bankrupt Iceland with unchecked expansion, CCP is determined not to encourage entities to become too big to fail.

This is similar to a nasty incident in Second Life a while back, but SL’s banks are governed by US banking law, and so Linden Lab takes a much more hands-on approach to its economy.

It’ll be interesting to see how this pans out; it’s easy to dismiss the travails of a metaverse bank as irrelevant, but as they become more complex (not to mention valuable in real-world terms), metaverse economies may become a valuable testing ground for alternative economic theories. Anything that helps us avoid another real-world clusterfuck has got to be worth keeping an eye on, right? [via MetaFilter; image by Pentadact]

Your new credit card, courtesy the US Treasury

There’s no shortage of weird and wonderful ideas flying around with regard to fixing the financial systems and making them fairer for the end users (i.e. most of us), but this is the first time I’ve heard this one crop up: state-backed interest-free transactional credit – or, in layman’s terms, a credit card issued by the government.

Access to revolving credit should be rationed, but transactional credit should indeed be ubiquitous. Not having to carry and count cash, deal with paper checks, or even worry about some particular account’s balance at the time of purchase are important benefits. Indeed, an efficient payments system is a public good. That’s why states are in the business of establishing currencies, right?

In fact, while transactional credit provision is a perfectly good business, it might be reasonable for the state to offer basic transactional credit as a public good. This would be very simple to do. Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors. (Private creditors would be expected to inquire whether a person is in arrears on their public card when making credit decisions, but would not be permitted to obtain or retain historical information. Nonpayment of public advances would not constitute default, but the exercise of an explicit forbearance option in exchange for denial of further credit.) Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.

As is immediately pointed out in the resulting comment thread at MetaFilter, there’s a strong aroma of socialism around that idea which would prevent its adoption… not to mention the fierce anger of the credit card companies, should the idea be tabled seriously. But if there’s one thing we should have learned over the last few years, it’s that schemes which frighten the companies who make a killing by lending us money are well worth considering more closely.