High speed trading

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pages: 356 words: 105,533

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, buy and hold, Chuck Templeton: OpenTable:, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game

In November 2007, Trading Machines launched with $20 million. While small by some standards, it was deemed substantial for a high-speed trading outfit—and spoke to the economics of the business. Fast traders make money by picking up pennies and nickels on thousands of trades a day. Because they move in and out of positions so rapidly, they can recycle a small amount of cash over and over again. Imagine lowering a water-powered generator into a stream of water. The faster the stream, the more energy it generates. The ability to scale up to massive volumes with seemingly little risk—in effect causing the stream to flow more rapidly—was a major reason why high-speed trading had become one of the industry’s hottest strategies by the late 2000s. Trading Machines was among the elite at this approach.

The new wave of dark pools epitomized a driving force in finance as old as time: secrecy. In part a solution to a problem, they were also the symptom of a disease. The lit market had become a playground for highly sophisticated traders—many of the very traders sitting in Mathisson’s audience—who’d designed and deployed the robo algos that hacked the market’s plumbing. Sadly, the exchanges had helped make all of this possible. They provided to the high-speed trading firms expensive, data-rich feeds that broadcast terabytes of information about specific buy and sell orders from giant mutual funds to the Bot algos. So much information that it could be used to engage in the hit-and-run tactics regulators, fund managers, and senators were screaming about. This was all playing out every day, every nanosecond, in the lit markets—a frenzied dance of predator and prey, with Mathisson’s peers playing the part of the swarming piranha.

It was a new version of the old stock market—and highly toxic. Bodek began to think it had become broken at its core. If I’m swinging at market phantoms, buying too high, selling too low, what chance do ordinary investors have? It was so complex. The number of destinations for trading stocks was maddening. There were four public exchanges: the NYSE, Nasdaq, Direct Edge, and BATS (the latter two, which specialized in high-speed trading, appeared on the scene in 2005 and 2006, respectively). Inside each of those exchanges were various other destinations. The NYSE had NYSE Arca, NYSE Amex, NYSE Euronext, and NYSE Alternext. Nasdaq had three markets. BATS had two. Direct Edge had EDGA, which had no “maker-taker” system, and EDGX, which did. Then there were the dark pools. Giant banks ran most of them. Credit Suisse owned the largest, Dan Mathisson’s Crossfinder.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

“I’m pleased that SEC Chairman Schapiro has said the Commission will soon move to ban flash orders. But that is not the end of the story. It is becoming increasingly clear that naked short selling was just the first of a series of issues surrounding the way stock trades are executed that create unfair advantages for powerful insiders,” he said. “We seem to be learning more every day about certain order types, high-speed trading, collocation of servers at exchanges, dark pools, and other indications that we have a two-tiered market: one for privileged insiders with high-speed computers and another for the average investor who must follow the rules. We need the SEC to move with urgency to restore investor protections and thereby strengthen the credibility and integrity of America’s financial markets,” he said. In short, Kaufman wanted Schapiro to take the high-frequency traders head on.

Getco registered as a New York Stock Exchange (NYSE) specialist firm, and its competitors believed it was trying to convince regulators to make all HFT firms engaged in market-making activities to register with the SEC and adhere to strict capital standards, a change that would have driven many of the smaller trading firms out of business. Banks and Wall Street brokerages also established proprietary high-speed trading desks. But the majority of high-frequency traders were smaller proprietary trading shops or “prop shops,” which had no outside customers. They clustered around New York and Chicago to be close on the one hand to securities markets and on the other to the Chicago Mercantile Exchange (CME). The public often mislabeled high-frequency traders as “Quants.” The term is short for quantitative traders and refers to graduates of elite schools such as MIT and the University of Chicago whose inventiveness over the past 30 years has brought marvelous wonders to the marketplace.

It took the company 47 minutes to realize it had gone bust and to call its clearing bank, to apprise it of the situation.4 Most HFT firms were collocating machines at multiple exchanges in both the equities and commodities markets, and the exchanges always welcomed these customers with open arms. Regulation National Market System (NMS), which had fostered competition among the exchanges to reduce costs to investors, had created a market in which HFT firms could thrive and so change the nature of trading that it became toxic for most everyone else. Endnotes 1. Jill Barshay, “High-Speed Trading Goes Off the Street,” Market Watch, August 26, 2009. http://marketplace.publicradio.org/display/web/2009/08/26/pm-colocation/. 2. Ibid. 3. Jacob Bunge, “DJ NYSE Euronext Turns on NJ Data Center as Emigration Begins,” Dow Jones News Wires, August 25, 2010. 4. Carol L. Clark, “Controlling Risk in a Lightning-Speed Trading Environment,” Chicago Fed Letter, March 2010, No. 272. 16.


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, backtesting, big-box store, Black-Scholes formula, call centre, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, Flash crash, G4S, Gödel, Escher, Bach, High speed trading, Howard Rheingold, index fund, Isaac Newton, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, Marc Andreessen, Mark Zuckerberg, market bubble, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

He later turned his industrious focus to stamp buying, selling, and trading. The irregular market, in which some stamps sold for more in one place than they did in another, enthralled him. He had discovered arbitrage, where one takes advantage of similar asset markets with disparate prices. An arbitrageur buys where the price is lower and sells where the price is higher—a strategy that, in far faster form, comprises the backbone of many modern high-speed trading operations. After graduating high school, Peterffy studied advanced geometry in a technical school for surveyors, with a long-term goal of college and a degree in civil engineering. But his education was derailed in 1965 when, at twenty-one, he got a short-term visa to visit some distant relatives in West Germany. He seized this opportunity in Americanized Germany to apply for a U.S. immigration permit, which he eventually received.

At Mocatta’s headquarters in Manhattan, Peterffy’s programmers worked at computer screens and read market data as it came in on Teletype machines. The programmers then typed the data by hand into their computers, whose algorithms issued prices for Mocatta to quote on the New York Commodities Exchange floor. The programmers, speaking to clerks near the floor action downtown, would bark out quotes as fast as the algorithm issued them, and Mocatta’s clerks would signal the prices to their pit traders with hand gestures. It was hardly high-speed trading, but it was the first time markets were consistently dictated by an algorithm. And the best part for Peterffy: the rest of the market had little idea where he got his numbers from. He might have entered Wall Street as a hacker with little market sense, but Peterffy’s trading instincts—born while chopping up chewing gum sticks, chasing scrap metal, and pawning stamps—became sharpened.

Peterffy thinks that in this age of light-speed trading, bids and offers on stocks should be held up for a minimum amount of time, still far less than a second, but enough to eliminate the head fakes, parries, and trickery that comprise the contemporary market and that lead us to clifflike falls and rocketlike spikes. His ultimate fear is that a rogue series of algorithms sparks a string of colossal losses that their owners can’t cover. Because some high-speed trading algorithms are able to trade on margin with leverage, it’s conceivable that a series of bad trades, all conducted in seconds, could lead to a liquidity crisis, bankrupting a trader’s broker and the clients he trades for. Such incidents have nearly happened before. In late 2009, Chicago’s Infinium Capital Management, one of the more secretive and powerful trading houses in the United States, twice lost control of an algorithm that began selling S&P 500 futures as fast as it could, dropping the market.


Humble Pi: A Comedy of Maths Errors by Matt Parker

8-hour work day, Affordable Care Act / Obamacare, bitcoin, British Empire, Brownian motion, Chuck Templeton: OpenTable:, collateralized debt obligation, computer age, correlation does not imply causation, crowdsourcing, Donald Trump, Flash crash, forensic accounting, game design, High speed trading, Julian Assange, millennium bug, Minecraft, obamacare, orbital mechanics / astrodynamics, publication bias, Richard Feynman, Richard Feynman: Challenger O-ring, selection bias, Tacoma Narrows Bridge, Therac-25, value at risk, WikiLeaks, Y2K

But which part of city living is recorded in our longest-surviving mathematical documents? Brewing beer. Beer gave us some of humankind’s first calculations. And beer continues to help us make mistakes to this very day. Computerized money mistakes Our modern financial systems are now run on computers, which allows humans to make financial mistakes more efficiently and quickly than ever before. As computers have developed they have given birth to modern high-speed trading, where a single customer within a financial exchange can put through over a hundred thousand trades per second. No human can be making decisions at that speed, of course; these are the result of high-frequency trading algorithms where traders have fed requirements into the computer programs they have designed to automatically decide exactly when and how to make purchases and sales. Traditionally, financial markets have been a means of blending together the insight and knowledge of thousands of different people all trading simultaneously; the prices are the cumulative result of the hivemind.

Traditionally, financial markets have been a means of blending together the insight and knowledge of thousands of different people all trading simultaneously; the prices are the cumulative result of the hivemind. If any one financial product starts to deviate from its true value, then traders will seek to exploit that slight difference, and this results in a force to drive prices back to their ‘correct’ value. But when the market becomes swarms of high-speed trading algorithms, things start to change. In theory, the result of high-frequency trading algorithms should be the same as the results gained by high-frequency trading people – to synchronize prices across different markets and reduce the spread of values – but on an even finer scale. Automatic algorithms are written to exploit the smallest of price differences and to respond within milliseconds.

This is the best I could find: Studies of growth of this type give the impression of some mathematically precise control which operates independently in different body parts. – The Making of a Fly, Peter Lawrence (p. 50) I think we can all take something away from that. And it makes my purchase of the book now, technically, tax deductible. (Although probably not at the original price.) And they would have gotten away with it too, if it weren’t for the meddling laws of physics. In high-speed trading, data is king. If a trader has exclusive information about what the price of a commodity is likely to do next, they can place orders before the market has a chance to adjust. Or rather, that data can go straight into an algorithm that can make the order, placing decisions at incredible speeds. These times are measured in milliseconds. In 2015 Hibernia Networks spent $300 million laying a new fibre-optic cable between New York and London to try to reduce communication times by 6 milliseconds.


pages: 282 words: 80,907

Who Gets What — and Why: The New Economics of Matchmaking and Market Design by Alvin E. Roth

Affordable Care Act / Obamacare, Airbnb, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, Build a better mousetrap, centralized clearinghouse, Chuck Templeton: OpenTable:, commoditize, computer age, computerized markets, crowdsourcing, deferred acceptance, desegregation, experimental economics, first-price auction, Flash crash, High speed trading, income inequality, Internet of things, invention of agriculture, invisible hand, Jean Tirole, law of one price, Lyft, market clearing, market design, medical residency, obamacare, proxy bid, road to serfdom, school choice, sealed-bid auction, second-price auction, second-price sealed-bid, Silicon Valley, spectrum auction, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, The Wealth of Nations by Adam Smith, two-sided market, uber lyft, undersea cable

Such a trader might be able to buy from them at their old prices (now out of date, or “stale”) and then moments later sell back to them at the new higher prices. The wider the spreads the liquidity providers quote, the further prices have to jump before they can be exploited on both sides of the trade this way, and the more they pass on the cost of protecting themselves to ordinary investors. Very high speed trading can also contribute to instability in the market. A famous example, in which high-speed trading of ES futures and SPY exchange-traded funds was implicated, is the “flash crash” of 2010. In just four minutes, the prices of futures and of the related SPY exchange-traded funds (as well as many of the stocks in the index) were driven down by several percentage points—a very big move, in the absence of earth-shattering news—and then recovered almost as fast.

Let’s take a look at each in turn, starting with the fastest market of all: finance. A Game of (Milli)Seconds Not far from where wheat futures are traded at the Chicago Board of Trade, there’s another marketplace, the Chicago Mercantile Exchange. And near them both, at the University of Chicago, an innovative market designer named Eric Budish (a former student of mine) has been thinking about high-speed trading at both exchanges. Budish is looking at the growing use of computerized algorithms and how they influence financial markets. He’s also looking at how changes in the design of financial marketplaces might help solve some of their long-standing structural problems. The Chicago Mercantile Exchange is a lot like the New York Stock Exchange. For one thing, they both have similar market designs: trades are made via a continuous electronic limit order book, which records the offers to buy (bids) and the offers to sell (asks) starting with the highest bid first and the lowest ask first.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

, Knowledge@Wharton, February 2, 2011. 2. Michael E. Porter, Cases in Competitive Strategy (New York: Free Press, 1983), 212. 3. Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny, “The Impact of Institutional Trading on Stock Prices,” Journal of Financial Economics 32 (1992): 23–43. 4. Bob Pisani. Man Vs. Machine: Pros and Cons of High-Speed Trading. CNBC, September 13, 2011, www.cnbc.com/id/39041598/Man_Vs_Machine_Pros_and_Cons_of_High_Speed_Trading. Chapter 7 Bonds Bonds for Safety and Income During periods of prosperity when the economy is healthy and expanding, bonds provide a steady stream of income while also dampening the volatility of the stock market. There are, however, periods when the entire economy goes through a period of deflation, serious financial crisis, or some combination of destabilizing events.

Only 11 percent of all stock transactions today are individual retail investors.4 See Figure 6.1. Figure 6.1 Percentage of Daily Trades by Group. What this means is that nearly 9 out of 10 trades happening each day on Wall Street are between professionals. These groups are largely all trading against each other. Each has access to the same information, the same real-time news, the same hot tips, the same high speed trading systems, and so on. Yet, in every trade one party has decided to buy a stock and one has decided to sell that same stock. These professional groups of buyers and sellers are both trading on virtually identical information and making decisions that are 180 degrees away from each other. How can that be? Simple: They are trading on random noise. These professional groups of buyers and sellers are both trading on virtually identical information and making decisions that are 180 degrees away from each other.


pages: 268 words: 75,850

The Formula: How Algorithms Solve All Our Problems-And Create More by Luke Dormehl

3D printing, algorithmic trading, Any sufficiently advanced technology is indistinguishable from magic, augmented reality, big data - Walmart - Pop Tarts, call centre, Cass Sunstein, Clayton Christensen, commoditize, computer age, death of newspapers, deferred acceptance, disruptive innovation, Edward Lorenz: Chaos theory, Erik Brynjolfsson, Filter Bubble, Flash crash, Florence Nightingale: pie chart, Frank Levy and Richard Murnane: The New Division of Labor, Google Earth, Google Glasses, High speed trading, Internet Archive, Isaac Newton, Jaron Lanier, Jeff Bezos, job automation, John Markoff, Kevin Kelly, Kodak vs Instagram, lifelogging, Marshall McLuhan, means of production, Nate Silver, natural language processing, Netflix Prize, Panopticon Jeremy Bentham, pattern recognition, price discrimination, recommendation engine, Richard Thaler, Rosa Parks, self-driving car, sentiment analysis, Silicon Valley, Silicon Valley startup, Slavoj Žižek, social graph, speech recognition, Steve Jobs, Steven Levy, Steven Pinker, Stewart Brand, the scientific method, The Signal and the Noise by Nate Silver, upwardly mobile, Wall-E, Watson beat the top human players on Jeopardy!, Y Combinator

If this is the case, then how many shipwrecks do we need before we stop building ships? Those looking for stories of algorithms run amok can certainly find them with relative ease. On May 6, 2010, the Dow Jones Industrial Average plunged 1,000 points in just 300 seconds—effectively wiping out close to $1 trillion of wealth in a stock market debacle that became known as the Flash Crash. Unexplained to this day, the Flash Crash has been pinned on everything from the impact of high-speed trading to a technical glitch.15 Yet few people would seriously put forward the view that algorithms are, in themselves, bad. Indeed, it’s not simply a matter of algorithms doing the jobs that were once carried out manually; in many cases algorithms perform tasks that would be impossible for a human to perform. Particularly, algorithms like those utilized by Google that rely on unimaginably large datasets could never be reenacted by hand.

Farewell to the Working Class: An Essay on Post-Industrial Socialism (London: Pluto Press, 1982). Rifkin, Jeremy. The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era (New York: G. P. Putnam’s Sons, 1995). 14 Evans, Christopher. The Mighty Micro (Sevenoaks, UK: Coronet, 1980). 15 Keim, Brandon. “Nanosecond Trading Could Make Markets Go Haywire.” Wired, February 16, 2012. wired.com/wiredscience/2012/02/high-speed-trading/. 16 bbc.co.uk/news/technology-18427851. 17 Fallows, Deborah. Search Engine Users, January 23, 2005. Pew Research Center and American Life Project, pewinternet.org. 18 Vaidhyanathan, Siva. The Googlization of Everything (and Why We Should Worry) (Berkeley: University of California Press, 2011). 19 MacCormick, John. Nine Algorithms That Changed the Future: The Ingenious Ideas That Drive Today’s Computers (Princeton, N.J.: Princeton University Press, 2012). 20 Anderson, Chris.


pages: 250 words: 87,722

Flash Boys: A Wall Street Revolt by Michael Lewis

automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, latency arbitrage, pattern recognition, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

Exactly why speed was so important to them was not clear; what was clear was that they felt threatened by this faster new line. “Somebody would say, ‘Wait a second,’ ” recalls Carley. “ ‘If we want to continue with the strategies we are currently running, we have to be on this line. We have no choice but to pay whatever you’re asking. And you’re going to go from my office to talk to all of my competitors.’ ” “I’ll tell you my reaction to them,” says Darren Mulholland, a principal at a high-speed trading firm called Hudson River Trading. “It was, ‘Get out of my office.’ The thing I couldn’t believe was that when they came to my office they were going to go live in a month. And they didn’t even know who the clients were! They only discovered us from reading a letter we’d written to the SEC. . . .Who takes those kinds of business risks?” For $300,000 a month plus a few million more in up-front expenses, the people on Wall Street then making perhaps more money than people have ever made on Wall Street would enjoy the right to continue doing what they were already doing.

The pension fund would not be able to say, for example, whether the Wall Street bank allowed its own proprietary traders to know of the big buy order, or if those traders had used their (faster than the dark pool) market connections to front-run the order on the public exchanges. Even if the Wall Street bank resisted the temptation to trade for itself against its own customers, there was virtually no chance they resisted the temptation to sell access to the dark pool to high-frequency traders. The Wall Street banks did not disclose which high-speed trading firms had paid them for special access to their dark pools, or how much they had paid, but selling that access was standard practice. Raising, again, the obvious question: Why would anyone pay for access to the customers’ orders inside a Wall Street bank’s dark pool? The straight answer was that a customer’s stock market order, inside a dark pool, was fat and juicy prey. The order was typically large, and its movements were especially predictable: Each Wall Street bank had its own detectable pattern for handling orders.


pages: 268 words: 81,811

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History by Liam Vaughan

algorithmic trading, backtesting, bank run, barriers to entry, Bernie Madoff, Black Swan, Bob Geldof, centre right, collapse of Lehman Brothers, Donald Trump, Elliott wave, eurozone crisis, family office, Flash crash, high net worth, High speed trading, information asymmetry, Jeff Bezos, Kickstarter, margin call, market design, market microstructure, Nick Leeson, offshore financial centre, pattern recognition, Ponzi scheme, Ralph Nelson Elliott, Ronald Reagan, sovereign wealth fund, spectrum auction, Stephen Hawking, the market place, Tobin tax, tulip mania, yield curve, zero-sum game

Geithner proposed that he, Gensler, and Schapiro meet with the heads of the major exchanges the following week and drew the conversation to a close. Notwithstanding this information black hole, the government was under pressure to reassure the public that it had matters under control. Throughout the next day and into the weekend, the Flash Crash dominated the press, and the consensus was that the rise in algorithmic trading was to blame. “High-Speed Trading Glitch Costs Investors Billions,” wrote the New York Times. The timing could hardly have been worse. That month, the biggest finance bill since the Great Depression, the Dodd-Frank Wall Street Reform and Consumer Protection bill, was wheedling its way across the floor of the Senate. It was a mammoth piece of legislation that already had staff at the agencies working around the clock. Its focus, however, was on regulating derivatives and making banks more resilient in light of the 2008 financial crisis.

CHAPTER 11: THE AFTERMATH Since 2005 and the introduction of a set of rules: The Regulation National Market System, or “Reg NMS,” rules were introduced by the SEC to try to foster competition in U.S. stock markets and ensure investors received the best possible price for their orders. One consequence was a significant rise in the number of exchanges and alternative trading venues and, in response to that, an explosion in the number of HFT firms seeking to capitalize on the opportunities thrown up by the fragmented new market structure. “High-Speed Trading Glitch Costs Investors Billions”: Nelson D. Schwartz and Louise Story, New York Times, May 6, 2010. “A temporary $1 trillion drop in market value”: Mark R. Warner, senator from Virginia, “Investigating the Wall Street Freefall,” May 7, 2010, https://warner.senate.gov. It was an illustrious group: The committee’s members were Brooksley Born, ex-CFTC chair; Jack Brennan, ex-CEO of investment company the Vanguard Group; NYU Stern professor Robert Engle; Richard Ketchum, former director of market regulation at the SEC; Cornell professor Maureen O’Hara; ex–Federal Reserve board member Susan Phillips; ex–SEC chair David Ruder; and Joseph Stiglitz from Columbia Business School.


High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, natural language processing, offshore financial centre, pattern recognition, price discovery process, price discrimination, price stability, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

To understand what led to the emergence of high-frequency trading, however, we have to turn the clock back five years. HFT strategies were made possible by legislative changes in the US (Regulation National Market System law of 2005, known as “Reg NMS”) and Europe (the Markets in Financial Instruments Directive, or “MiFID”, in force since November 2007), preceded by substantial technological advances in computation and communication. High-speed trading had been technologically possible for many years, but it was legislative action that made HFT profitable. MiFID fostered greater competition among brokers, with the objective of improving liquidity, cohesion and depth in financial markets. It allowed new, highly technological competitors to enter the European markets, thereby introducing competition for what had been a relatively quiescent, exchange-dominated market structure.

Zimmermann, 2013, “Securities Transaction Tax and Marked Quality: The Case of France”, Working Paper. Hagströmer, B., and L. L. Nordén, 2013. “The Diversity of High-Frequency Traders”, Journal of Financial Markets, forthcoming. Hasbrouck, J., and G. Saar, 2013, “Low Latency Trading”, Journal of Financial Markets, forthcoming. Hendershott, T., C. M. Jones and A. J. Menkveld, 2011, “Does Algorithmic Trading Improve Liquidity?” Journal of Finance 66, pp. 1–33. Javers, E., 2013, “How High-Speed Trading Is about to Get Speedier”, April 11. URL: http://www.cnbc.com/. Jones, C., 2013, “What Do We Know about High Frequency Trading?”, Working Paper. Linton, O., M. O’Hara and J. P. Zigrand, 2012, “Economic Impact Assessments on Policy Measures”, in Foresight: The Future of Computer Trading in Financial Markets. An International Perspective, Final Project Report, Chapter 6. The Government Office for Science, London.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable:, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, search engine result page, shareholder value, Silicon Valley, Snapchat, social intelligence, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, zero-sum game

HFT often involves “very high order amounts; rapid order cancellation; a flat position at the end of the trading day; extracting very low margins per trade; and trading at ultra-fast speeds.” Andrew J. Keller, “Robocops: Regulating High Frequency Trading after the Flash Crash of 2010,” Ohio State Law Journal 73 (2012): 1459. 121. Matthew O’Brien, “High-Speed Trading Isn’t About Efficiency—It’s About Cheating,” The Atlantic, February 8, 2014. Available at http://www.the atlantic .com /business /archive /2014 /02/high-speed-trading -isnt-about-efficiency-its-about-cheating /283677/; Charles Schwab and Walt Bettinger, “Statement on High-Frequency Trading,” April 3, 2014. Available at http:// www.aboutschwab.com /press/issues/statement _on _high _frequency_trading. 122. Robert Hiltonsmith, The Retirement Savings Drain: The Hidden and Excessive Costs of 401(k)s (New York: Dēmos, 2012).


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

The key point is that the public policy decisions that aided financialization didn’t happen all at once, but were taken incrementally, creating a dysfunctional web of changes in areas like tax, trade, regulatory policy, corporate governance, and law. It’s a web that will take time and tremendous effort to dismantle. Financialization is behind the shifts in our retirement system and tax code that have given banks ever more money to play with, and the rise of high-speed trading that has allowed more and more risk and leverage in the system to serve up huge profits to a privileged few. It is behind the destructive deregulation of the 1980s and 1990s, and the failure to reregulate the banking sector properly after the financial crisis of 2008. Individuals from J.P. Morgan and Goldman Sachs may (or, more often, may not) go to jail for reckless trading, but the system that permitted their malfeasance remains in place.

Not only that, but it was also the nail in the coffin of Glass-Steagall, the Depression-era banking legislation that had kept consumers relatively safe from exploitation by financial interests since the 1930s. Weill called the merger “the greatest deal in the history of the financial services industry” and “the crowning of my career.”1 It was a transaction that would allow the newly formed company to offer pretty much every financial service ever invented, from credit cards to corporate IPO underwriting, high-speed trading to mortgages, investment advice to the sale of any complex security you could imagine, in 160-plus countries, twenty-four hours a day. As with the British Empire in a former era, the sun never set on Citigroup. So it was quite a moment when, in mid-2012, the emperor had an ideological abdication. Weill, who stepped down as Citi CEO in 2003 and has recently undergone something of an existential crisis over his role in the worst financial crash in eighty years, went on CNBC and declared that pretty much everything he’d believed about the bank, and about finance, was wrong.


pages: 903 words: 235,753

The Stack: On Software and Sovereignty by Benjamin H. Bratton

1960s counterculture, 3D printing, 4chan, Ada Lovelace, additive manufacturing, airport security, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, Amazon Mechanical Turk, Amazon Web Services, augmented reality, autonomous vehicles, basic income, Benevolent Dictator For Life (BDFL), Berlin Wall, bioinformatics, bitcoin, blockchain, Buckminster Fuller, Burning Man, call centre, carbon footprint, carbon-based life, Cass Sunstein, Celebration, Florida, charter city, clean water, cloud computing, connected car, corporate governance, crowdsourcing, cryptocurrency, dark matter, David Graeber, deglobalization, dematerialisation, disintermediation, distributed generation, don't be evil, Douglas Engelbart, Douglas Engelbart, Edward Snowden, Elon Musk, en.wikipedia.org, Eratosthenes, Ethereum, ethereum blockchain, facts on the ground, Flash crash, Frank Gehry, Frederick Winslow Taylor, future of work, Georg Cantor, gig economy, global supply chain, Google Earth, Google Glasses, Guggenheim Bilbao, High speed trading, Hyperloop, illegal immigration, industrial robot, information retrieval, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invisible hand, Jacob Appelbaum, Jaron Lanier, Joan Didion, John Markoff, Joi Ito, Jony Ive, Julian Assange, Khan Academy, liberal capitalism, lifelogging, linked data, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Masdar, McMansion, means of production, megacity, megastructure, Menlo Park, Minecraft, MITM: man-in-the-middle, Monroe Doctrine, Network effects, new economy, offshore financial centre, oil shale / tar sands, packet switching, PageRank, pattern recognition, peak oil, peer-to-peer, performance metric, personalized medicine, Peter Eisenman, Peter Thiel, phenotype, Philip Mirowski, Pierre-Simon Laplace, place-making, planetary scale, RAND corporation, recommendation engine, reserve currency, RFID, Robert Bork, Sand Hill Road, self-driving car, semantic web, sharing economy, Silicon Valley, Silicon Valley ideology, Slavoj Žižek, smart cities, smart grid, smart meter, social graph, software studies, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Startup school, statistical arbitrage, Steve Jobs, Steven Levy, Stewart Brand, Stuxnet, Superbowl ad, supply-chain management, supply-chain management software, TaskRabbit, the built environment, The Chicago School, the scientific method, Torches of Freedom, transaction costs, Turing complete, Turing machine, Turing test, undersea cable, universal basic income, urban planning, Vernor Vinge, Washington Consensus, web application, Westphalian system, WikiLeaks, working poor, Y Combinator

The limits of machinic calculation are not the same as the limits of deterministic rationality, and the social effects of computational systems are certainly given to creative accidents.17 Reactionary analog aesthetics and patriotisms, Emersonian withdrawal, and deconstrucivist political theology buy us less time and far less wiggle room than they promise, even less actually than the unfortunate notion that planetary-scale computation could emerge and mature without fundamental constitutive violence against traditional (that is, “modern”) concepts of individual, society, and sovereignty. Because they simulate logic but are not themselves necessarily logical, computers make the world in ways that do not ultimately require our thinking to function (such as the interactions between high-speed trading algorithms that even their programmers cannot entirely predict and comprehend). The forms of inhuman intelligence that they manifest will never pass the Turing test, nor should we bother asking this of them. It is an absurd and primitive request.18 It is inevitable that synthetic algorithmic intelligences can and will create things that we have not thought of in advance or ever intended to make, but as suggested, because they do not need our thinking or intention as their alibi, it is their inhumanity that may make them most creative.19 Like Deleuze on the beach making sand piles, humans wrangle computation with our algorithm boxes, and in doing so, we make things by accident, sometimes little things like signal noise on the wire and sometimes big things like megastructures. 17. 

In this large-scale bandwidth, provision and access becomes a core spatial planning strategy, whether for small market cities like Kansas City, Missouri, the first test bed for Google's 100 megabyte fiber network, or for large market actors like traders who relocate their offices farther down the island in Manhattan to get closer to the central switches on Wall Street and shave nanoseconds off high-speed trading cycles. Despite its global spread and horizontal ubiquity, for Stack urbanism, proximity to the center, as defined by supermassive concentrations of bit flows, is seen as essential. 12.  See David Kusner, “The Real Story of Stuxnet,” IEEE Spectrum, February 23, 2013, http://spectrum.ieee.org/telecom/security/the-real-story-of-stuxnet. 13.  As well as simulations of all of these, as evidenced by the imaginary ISIS attack on Louisiana as invented by Russian mischief makers.

Among other things, the financial crisis is a crisis of addressability, a de-addressing of things, and one that continues consolidating a shift within global market economics (when not also collapsing them). We can only anticipate what forms of high weirdness will ensue, as the paired computerization of matter-into-monies (i.e., carbon credits trading, where the value of money is itself measured in carbon) and monies-into-virtuality (i.e., the light pulses of high-speed trading) continues to evolve and accelerate.8 New addressing schemes to locate and coordinate instances of value are multiplying, both as generic currency (bitcoin blockchains) and as platforms for brokering things-with-value (various sharing economy schemes). At stake in all this is also the design of the economy of information itself, from the smallest-scale object or gesture to the largest topological frameworks, and interrelations across scales by drawing and managing an orthodox map in the form of an address table.9 What gets to count and to whom, and who profits from merely counting?


pages: 553 words: 168,111

The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah McGrath Goodman

anti-communist, Asian financial crisis, automated trading system, banking crisis, barriers to entry, Bernie Madoff, computerized trading, corporate governance, corporate raider, credit crunch, Credit Default Swap, East Village, energy security, Etonian, family office, Flash crash, global reserve currency, greed is good, High speed trading, light touch regulation, market fundamentalism, peak oil, Peter Thiel, pre–internet, price mechanism, profit motive, regulatory arbitrage, reserve currency, rolodex, Ronald Reagan, side project, Silicon Valley, upwardly mobile, zero-sum game

They pointed to what they called “phantom trading volume,” “fake orders,” and “quote-stuffing” that made oil prices appear to be headed one way when they were really headed another. It was a problem worth looking into, but with Washington’s track record of understanding even the most basic financial instruments, like weather futures, it seemed unlikely it would be capable of troubleshooting advanced technology possibly being repurposed for the execution of illicit, high-speed trades. The trader accused of spilling the most blood in the new battlefield of financial warfare emerged not in the trading pits but in the unregulated over-the-counter market and outside U.S. borders. Since Nymex had gone electronic, traders didn’t need to be in the country anymore to game the U.S. energy market with the click of a mouse. Notably, the worst of the damage occurred just ten days after Nymex went to the screen.

Do you really think you can handle sitting at a desk all day and having some guy half your age telling you what to do? Do you think you can really cut Corporate America?’ You’d think being the vice chairman of the world’s biggest oil market would count for something, but I guess not. So I retired. Now I have a lot of season tickets to games and watch a lot of live sports.” Vinnie Viola Still a trader, Viola runs a Madison Avenue market-making firm and is a well-known champion of the kind of high-speed trading blamed for the disastrous “flash crash” of May 2010, when the stock market inexplicably plummeted, bleeding hundreds of billions of dollars, before bouncing back in just twenty minutes. He has continued opening other trading shops and running his banks in Texas. It’s a far cry from where he started, betting on gasoline in the pits with his boyhood friends from Brooklyn. “I don’t know what I think of my time at Nymex.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, money market fund, moral hazard, Myron Scholes, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

How is this useful to the other venues that are ready and willing to provide the liquidity? It short-changes competition by giving a select few the opportunity to play their hands without showing them. Longer term, it undermines the incentive for traders to show at least some interest in public markets. The exception to the regulation allowing flash orders was adopted in 1978, long before the use of high-speed trading systems. Now it is simply a loophole that needs to be closed. Who Decides the Best Price? This is what the Securities Reform Act of 1975 was all about: Creating a national market system to share securities transactions in real time. While the technology has changed from the original version, we still have a central network that consolidates trade information to create the tape. The Securities Industry Automation Corporation provides the communication systems that keep the three major tapes in the United States running.


pages: 252 words: 80,636

Bureaucracy by David Graeber

a long time ago in a galaxy far, far away, Affordable Care Act / Obamacare, airport security, Albert Einstein, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, David Graeber, George Gilder, High speed trading, hiring and firing, Kitchen Debate, late capitalism, means of production, music of the spheres, new economy, obamacare, Occupy movement, Parkinson's law, Peter Thiel, planetary scale, post-work, price mechanism, Ronald Reagan, self-driving car, Silicon Valley, South Sea Bubble, transcontinental railway, union organizing, urban planning, zero-sum game

Since what is the world of securitized derivatives, collateralized debt obligations, and other such exotic financial instruments but the apotheosis of the principle that value is ultimately a product of paperwork, and the very apex of a mountain of assessment forms which begins with the irritating caseworker determining whether you are really poor enough to merit a fee waiver for your children’s medicine and ends with men in suits engaged in high-speed trading of bets over how long it will take you to default on your mortgage. A critique of bureaucracy fit for the times would have to show how all these threads—financialization, violence, technology, the fusion of public and private—knit together into a single, self-sustaining web. The process of financialization has meant that an ever-increasing proportion of corporate profits come in the form of rent extraction of one sort or another.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Readers interested in finance are also spoiled by the quality of the writing. There’s no better place to start than with the work of Michael Lewis, perhaps beginning with his first book, Liar’s Poker, an account of his job working as a bond trader at Salomon Brothers, and then skipping forward to The Big Short, a riveting description of the shenanigans behind the credit crunch. His most recent book, Flash Boys, is an account of high-speed trading that will make your hair stand on end, if it hasn’t all fallen out from worry by the time you’ve finished reading it. Alice Shroeder’s The Snowball, a biography of Warren Buffett, is very different in tone and texture, but it brings in a lot of stories and information from the world of finance, as does Sebastian Mallaby’s More Money Than God, a (suprisingly and convincingly positive) study of hedge funds.


pages: 308 words: 84,713

The Glass Cage: Automation and Us by Nicholas Carr

Airbnb, Airbus A320, Andy Kessler, Atul Gawande, autonomous vehicles, Bernard Ziegler, business process, call centre, Captain Sullenberger Hudson, Charles Lindbergh, Checklist Manifesto, cloud computing, computerized trading, David Brooks, deliberate practice, deskilling, digital map, Douglas Engelbart, drone strike, Elon Musk, Erik Brynjolfsson, Flash crash, Frank Gehry, Frank Levy and Richard Murnane: The New Division of Labor, Frederick Winslow Taylor, future of work, global supply chain, Google Glasses, Google Hangouts, High speed trading, indoor plumbing, industrial robot, Internet of things, Jacquard loom, James Watt: steam engine, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, knowledge worker, Lyft, Marc Andreessen, Mark Zuckerberg, means of production, natural language processing, new economy, Nicholas Carr, Norbert Wiener, Oculus Rift, pattern recognition, Peter Thiel, place-making, plutocrats, Plutocrats, profit motive, Ralph Waldo Emerson, RAND corporation, randomized controlled trial, Ray Kurzweil, recommendation engine, robot derives from the Czech word robota Czech, meaning slave, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley ideology, software is eating the world, Stephen Hawking, Steve Jobs, TaskRabbit, technoutopianism, The Wealth of Nations by Adam Smith, turn-by-turn navigation, US Airways Flight 1549, Watson beat the top human players on Jeopardy!, William Langewiesche

At its Wall Street trading desk, it has installed a proprietary software program, called THOR, that actually slows down the transmission of buy and sell orders in a way that protects them from the algorithmic manipulations of high-speed traders. By slowing the orders, RBC has found, trades often end up being executed at more attractive terms for its customers. The bank admits that it’s making a trade-off in resisting the prevailing technological imperative of speedy data flows. By eschewing high-speed trading, it makes a little less money on each trade. But it believes that, over the long run, the strengthening of client loyalty and the reduction of risk will lead to higher profits overall.35 One former RBC executive, Brad Katsuyama, is going even further. Having watched stock markets become skewed in favor of high-frequency traders, he spearheaded the creation of a new and fairer exchange, called IEX.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, buy and hold, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, stocks for the long run, stocks for the long term, transaction costs, two-sided market, zero-sum game

The market is like a shattered vase that is now held together with glue called high frequency trading (HFT), and that glue is weak—very weak. In addition to fragmentation, under the cover of the digital revolution, conflicted stakeholders—stock exchanges, brokers, and owners of ATSs (alternative trading systems)—have • Enlisted their own regulators to help them create a mechanism that places high-speed trading interests above the interests of all other market participants, particularly investors. • Converted member-owned nonprofit legal structures into ones that are for-profit, which have enabled them to embark upon new business models centered around the creation and distribution of data feeds. • Perverted the true purpose and usage of tools like dark pools from mechanisms to effect large block trades for large mutual and pension funds to a means to feed internalization and proprietary HFT


pages: 285 words: 86,853

What Algorithms Want: Imagination in the Age of Computing by Ed Finn

Airbnb, Albert Einstein, algorithmic trading, Amazon Mechanical Turk, Amazon Web Services, bitcoin, blockchain, Chuck Templeton: OpenTable:, Claude Shannon: information theory, commoditize, Credit Default Swap, crowdsourcing, cryptocurrency, disruptive innovation, Donald Knuth, Douglas Engelbart, Douglas Engelbart, Elon Musk, factory automation, fiat currency, Filter Bubble, Flash crash, game design, Google Glasses, Google X / Alphabet X, High speed trading, hiring and firing, invisible hand, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, job automation, John Conway, John Markoff, Just-in-time delivery, Kickstarter, late fees, lifelogging, Loebner Prize, Lyft, Mother of all demos, Nate Silver, natural language processing, Netflix Prize, new economy, Nicholas Carr, Norbert Wiener, PageRank, peer-to-peer, Peter Thiel, Ray Kurzweil, recommendation engine, Republic of Letters, ride hailing / ride sharing, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, social graph, software studies, speech recognition, statistical model, Steve Jobs, Steven Levy, Stewart Brand, supply-chain management, TaskRabbit, technological singularity, technoutopianism, The Coming Technological Singularity, the scientific method, The Signal and the Noise by Nate Silver, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, Turing machine, Turing test, Uber and Lyft, Uber for X, uber lyft, urban planning, Vannevar Bush, Vernor Vinge, wage slave

For the pension fund, the trade would be just a little more expensive than anticipated, but iterated over millions of transactions a day the taxes become substantial. HFT offers one of the purest examples of algorithms that are fundamentally altering an existing culture machine, that venerable assemblage of math, social practices, faith-based communities, and arbitrage that we call “the market.” The introduction of high-speed trading and algorithms that are effectively fully automated engines of commerce has done more than eliminate humans from the trading floor: these systems operate in open competition with humans and one another, and they are gradually transforming the broader movement of capital. HFT arbitrageurs build their advantage through complex geographical maneuvers, by locating their servers and fiber-optic lines a few feet closer to the exchanges’ central servers than their competitors, or leasing communication lines that shave a few miles off the best direct signal pathway between two points on the financial grid.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

It costs a fortune to send trades through the cables along this more direct new route, like a superfast version of Federal Express, but many firms are willing to pay to minimize latency. After all, they save three whole milliseconds.4 Why are three milliseconds so important? For some traders, having an electronic buy or sell order arrive first can be the difference between making money and losing money. If only one share is available at a low price, the first buy order to arrive will secure that price. Any later orders might pay more. High-speed trading can be a kind of temporal arms race, like a superfast version of holiday shopping. If you aren’t among the first customers in line on Black Friday for the post-Thanksgiving sale, by the time you get in the door the best bargains will be gone. High-frequency traders say this kind of superfast computerized trading is good for all investors because we can buy or sell whenever we want at the lowest possible cost.


pages: 363 words: 92,422

A Fine Mess by T. R. Reid

Affordable Care Act / Obamacare, Bernie Sanders, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Donald Trump, Double Irish / Dutch Sandwich, game design, Gini coefficient, High speed trading, Home mortgage interest deduction, Honoré de Balzac, income inequality, industrial robot, land value tax, loss aversion, mortgage tax deduction, obamacare, Occupy movement, offshore financial centre, oil shock, plutocrats, Plutocrats, race to the bottom, Ronald Reagan, seigniorage, Silicon Valley, Skype, Snapchat, sovereign wealth fund, Tesla Model S, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, We are the 99%, WikiLeaks

Countries like Australia, Canada, and the U.K. can show us how to harmonize a national consumption tax with state and local sales taxes. The United States should follow the lead of the European Union and many other countries by enacting one particular form of a consumption tax, the financial activities tax. As we saw in chapter 9, the tax rate for this kind of levy can be tiny—$1 on a million-dollar trade. Because of Wall Street’s current obsession with high-speed trading—buying securities, selling securities, swapping securities, all in a few millionths of a second—this tax can add up to significant revenue while adding an infinitesimal cost to each transaction. Taking the BBLR approach as the guiding principle of tax reform will go far to simplify the tax laws. If the tax code treated all income as income, and got rid of all the loopholes, the whole process of paying tax would be vastly simpler.


pages: 493 words: 98,982

The Tyranny of Merit: What’s Become of the Common Good? by Michael J. Sandel

affirmative action, Affordable Care Act / Obamacare, anti-communist, Berlin Wall, Bernie Sanders, Boris Johnson, Capital in the Twenty-First Century by Thomas Piketty, centre right, coronavirus, COVID-19, Credit Default Swap, Deng Xiaoping, Donald Trump, ending welfare as we know it, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, global supply chain, helicopter parent, High speed trading, immigration reform, income inequality, Khan Academy, laissez-faire capitalism, meta analysis, meta-analysis, Nate Silver, new economy, obamacare, Occupy movement, plutocrats, Plutocrats, Ronald Reagan, smart grid, Steve Jobs, Steven Levy, the market place, The Wealth of Nations by Adam Smith, Washington Consensus

In his book Flashboys , Michael Lewis tells the story of a company that laid a fiber-optic cable linking Chicago futures traders with New York stock markets. The cable increased the speed of trades on pork belly futures and other speculative bets by a few milliseconds. This minuscule edge was worth hundreds of millions of dollars to high-speed traders. 60 But it is hard to claim that speeding up such transactions from the blink of an eye to something even faster contributes anything of value to the economy. High-speed trading is not the only financial innovation of dubious economic value; credit default swaps that enable speculators to bet on future prices without investing in any productive activity are hard to distinguish from casino gambling. One party wins and the other loses, money changes hands, but no investment occurs along the way. When companies use profits to buy back shares instead of investing in research and development, or in new equipment, shareholders gain but the productive capacity of the company does not.


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

"Robert Solow", 3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, debt deflation, deskilling, disruptive innovation, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, knowledge worker, labor-force participation, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, plutocrats, Plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Rodney Brooks, Sam Peltzman, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, uber lyft, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

Likewise, automated trading algorithms are now responsible for nearly two-thirds of stock market trades, and Wall Street firms have built huge computing centers in close physical proximity to exchanges in order to gain trading advantages measured in tiny fractions of a second. Between 2005 and 2012, the average time to execute a trade dropped from about 10 seconds to just 0.0008 seconds,56 and robotic, high-speed trading was heavily implicated in the May 2010 “flash crash” in which the Dow Jones Industrial Average plunged nearly a thousand points and then recovered for a net gain, all within the space of just a few minutes. Viewed from this perspective, financialization is not so much a competing explanation for our seven economic trends; it is rather—at least to some extent—one of the ramifications of accelerating information technology.


pages: 382 words: 105,166

The Reckoning: Financial Accountability and the Rise and Fall of Nations by Jacob Soll

accounting loophole / creative accounting, bank run, Bonfire of the Vanities, British Empire, collapse of Lehman Brothers, computer age, corporate governance, creative destruction, Credit Default Swap, delayed gratification, demand response, discounted cash flows, double entry bookkeeping, financial independence, Frederick Winslow Taylor, God and Mammon, High speed trading, Honoré de Balzac, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, new economy, New Urbanism, Nick Leeson, Ponzi scheme, Ralph Waldo Emerson, Scientific racism, South Sea Bubble, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

Indeed, Dickens felt that accounting was so beyond human control that only luck could extricate his characters from the labyrinth created by numbers and paperwork.1 Considering that there have been centuries of struggles over financial accountability, our own recent inability to effectively audit and hold companies and governments accountable seems incomprehensible. And yet, our predicament follows a historical pattern: No sooner is an accounting reform made than we find a way to resist it. Indeed, the rise of technology has made the task of accountability even more daunting, as regulators and even auditors come up against labyrinthine big numbers and financial logarithms, high-speed trading, and complex financial products such as bundled mortgages. As governments struggle with the paradox of the power and frailty of the Big Four accounting firms, their own account books are in increasing disarray. Risky mortgage bundles are still difficult to value and pose a threat to banking and the stock market. American municipalities have gone bankrupt, and parts of Europe teeter on the brink of insolvency.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business cycle, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable:, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, digital map, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Metcalfe’s law, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, winner-take-all economy, zero-sum game, Zipcar

Yet the existence of arbitrage opportunities also highlights market inefficiencies. eBay now uses automated systems to provide spelling assistance, so sellers can have more confidence that they’ll receive what their items are worth. In a case like this, wise governance may disenfranchise a specific group of stakeholders, such as arbitrageurs, in order to increase the overall health of the ecosystem. High-speed trading on the New York Stock Exchange offers another example. Firms like Goldman Sachs use supercomputers to determine when an order placed in one market will spill over to another market. Then they swoop in to intercept the deal, buying low, selling high, and skimming the margin. This methodology gives a few market participants who can afford massive computing power an unfair advantage over others.35 Such asymmetric market power risks driving away players who feel cheated.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

Speaking as a financial expert, I’d say that $2 billion is quite a lot of money. Can you imagine operating a bank with risk management systems so slipshod that you can simply lose $2 billion? Do you not think that somebody might have noticed after, let’s say, the first few hundred million went missing? It’s astonishing how much money Wall Street handles – and how chaotic its control systems continue to be. 29 Javier Blas, ‘High-speed trading blamed for sugar rises,’ Financial Times, Feb. 8, 2011. 30 Peter Guest, ‘Volatility will go on in world’s largest cocoa supplier,’ CNBC News, April 28, 2011. Chapter 11: Collecting nickels in front of steamrollers 1 Michael Lewis, The Big Short (Allen Lane, 2010), p. 62. 2 Lewis, The Big Short, p. 61 3 Lewis, The Big Short, p. 63. See also Max Abelson, ‘Mr. Bubble bounces back,’ New York Observer, Sept. 7, 2011. 4 See an interesting discussion by Steven Malliaris and Hongjun Yan of the Yale School of Management: ‘Nickels versus black swans: reputation, trading strategies and asset prices,’ March 2009.


pages: 385 words: 123,168

Bullshit Jobs: A Theory by David Graeber

1960s counterculture, active measures, basic income, Berlin Wall, Bernie Sanders, Bertrand Russell: In Praise of Idleness, Bretton Woods, Buckminster Fuller, call centre, cognitive dissonance, collateralized debt obligation, David Graeber, Donald Trump, equal pay for equal work, full employment, global supply chain, High speed trading, hiring and firing, informal economy, Jarndyce and Jarndyce, Jarndyce and Jarndyce, job automation, John Maynard Keynes: technological unemployment, knowledge worker, moral panic, post-work, precariat, Silicon Valley, Silicon Valley startup, single-payer health, software as a service, telemarketer, The Future of Employment, Thorstein Veblen, too big to fail, Travis Kalanick, universal basic income, unpaid internship, wage slave, wages for housework, women in the workforce, working poor, Works Progress Administration, young professional, éminence grise

It just seemed to make sense that, just as Wall Street profits were derived less and less from firms involved in commerce or manufacturing, and more and more from debt, speculation, and the creation of complex financial instruments, so did an ever-increasing proportion of workers come to make their living from manipulating similar abstractions. These days, it’s hard to recall the almost mystical aura with which the financial sector had surrounded itself in the years leading up to 2008. Financiers had managed to convince the public—and not just the public, but social theorists, too (I well remember this)—that with instruments such as collateralized debt obligations and high-speed trading algorithms so complex they could be understood only by astrophysicists, they had, like modern alchemists, learned ways to whisk value out of nothing by means that others dared not even try to understand. Then, of course, came the crash, and it turned out that most of the instruments were scams. Many weren’t even particularly sophisticated scams. In a way, one could argue that the whole financial sector is a scam of sorts, since it represents itself as largely about directing investments toward profitable opportunities in commerce and industry, when, in fact, it does very little of that.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

Although this rule undoubtedly hurts some informed traders, it should have little long-run effect on the information content of prices. ◀ * * * Finally, public policy should be hostile to the efforts of profit-motivated traders who design trading strategies to exploit other traders. Price manipulators, bluffers, and front runners hurt other traders while doing nothing to make markets more liquid or prices more informative in the long run. This group also includes traders who employ very high-speed trading strategies to take liquidity from dealers who are slow to adjust their prices when values change. The value of the price discipline that they provide market makers over short intervals—typically, less than five seconds long—is small compared to the value of the liquidity that they take from the market. 9.7 SUMMARY Most people would like to have the best markets possible. To obtain such markets, sometimes regulators have to intervene to impose necessary changes, and sometimes we have to defend our markets against harmful regulatory interventions.

* * * ▶ SOES Banditry Some markets have rules designed to exclude parasitic traders. The response of the Nasdaq Stock Market to SOES banditry illustrates this approach. SOES bandits were traders who used the Nasdaq Small Order Execution System (SOES) to submit orders designed to profit from very short-term price changes. The losers generally were Nasdaq dealers who adjusted their quotes a few seconds too slowly. These dealers naturally complained vociferously. These high-speed trading strategies ultimately caused spreads to widen because dealers and other traders had to recover from other traders what they lost to the SOES bandits. Since Nasdaq wanted its markets to have narrow spreads, it tried to protect its dealers from SOES bandits. To this end, Nasdaq tried to classify SOES bandits as professional short-term traders and thereby restrict their access to the SOES system.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

See also: (1) Patterson, Scott, and Geoffrey Rogow, “What’s Behind High-Frequency Trading,” Wall Street Journal, Saturday/Sunday, August 1–2, 2009, page B1. (2) Wilmott, Paul, “Hurrying Into the Next Panic?”, New York Times, Wednesday, July 29, 2009, page A19. Krugman disagrees sharply Krugman, Paul, “Rewarding Bad Actors,” New York Times, Monday, August 3, 2009, page A19. See also O’Brien, Matthew, “High Speed Trading Isn’t About Efficiency—It’s About Cheating.” The Atlantic, February 2014. cut a trading rate The dollar value of all trades in U.S. equities varies from year to year, as does the portion created by the high-frequency traders. Business Day headline New York Times, September 28, 2000. CHAPTER 19 billion shares annually The Medallion Fund, a hedge fund closed to new investors, run by mathematician James Simons, includes a similar and far larger trading operation than ours with a higher rate of turnover and a vast annual trading volume.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Operational risk covers a wide variety of areas, from delays in finalizing legal documentation, to not sending cash payments in time, and even fraud. The collapse of Barings, the British investment bank, in 1995 partly as a result of the actions of a ‘rogue trader’ cast light on this danger, which has only become larger with the passage of time, including the use of rogue algorithms in computer-based high speed trading.24 Operational risk, consequently, has become a focal point of market-conforming regulation. The characteristic feature of Basel II introduced in 2004 but receiving a comprehensive form in 2006 was to incorporate both market and operational risk in its stipulations.25 The crisis of 2007, irrespective of its origins, is prima facie evidence of the failure of Basel II. One consequence, therefore, has been the further development of the regulatory framework through the Basel III Accord that began to take shape in 2010–2011.


pages: 543 words: 153,550

Model Thinker: What You Need to Know to Make Data Work for You by Scott E. Page

"Robert Solow", Airbnb, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Alvin Roth, assortative mating, Bernie Madoff, bitcoin, Black Swan, blockchain, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Checklist Manifesto, computer age, corporate governance, correlation does not imply causation, cuban missile crisis, deliberate practice, discrete time, distributed ledger, en.wikipedia.org, Estimating the Reproducibility of Psychological Science, Everything should be made as simple as possible, experimental economics, first-price auction, Flash crash, Geoffrey West, Santa Fe Institute, germ theory of disease, Gini coefficient, High speed trading, impulse control, income inequality, Isaac Newton, John von Neumann, Kenneth Rogoff, knowledge economy, knowledge worker, Long Term Capital Management, loss aversion, low skilled workers, Mark Zuckerberg, market design, meta analysis, meta-analysis, money market fund, Nash equilibrium, natural language processing, Network effects, p-value, Pareto efficiency, pattern recognition, Paul Erdős, Paul Samuelson, phenotype, pre–internet, prisoner's dilemma, race to the bottom, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, school choice, sealed-bid auction, second-price auction, selection bias, six sigma, social graph, spectrum auction, statistical model, Stephen Hawking, Supply of New York City Cabdrivers, The Bell Curve by Richard Herrnstein and Charles Murray, The Great Moderation, The Rise and Fall of American Growth, the rule of 72, the scientific method, The Spirit Level, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, urban sprawl, value at risk, web application, winner-take-all economy, zero-sum game

The second crash, the May 6, 2010, “flash crash” dropped the Dow Jones Industrial Average by 5% in three minutes. It was the result of algorithmic trades. Owing to the complexity and speed of modern financial markets, no one knows for certain what exactly caused the flash crash. We know that a large mutual fund made a huge sell order, dumping over $4 billion of stock futures into a market containing high-speed trading algorithms that try to exploit beneficial trades. The algorithms sensed a price trend and starting executing trades at breakneck speed. Imagine the riot model at high speed. This produced a toxic market, in which traders worry that large institutional investors know something that they do not know and so they exit the market.6 Many of the algorithms stopped trading given the abnormal market behavior; other algorithms kept selling, and a crash ensued, all in the span of a couple of minutes.


pages: 486 words: 150,849

Evil Geniuses: The Unmaking of America: A Recent History by Kurt Andersen

affirmative action, Affordable Care Act / Obamacare, airline deregulation, airport security, always be closing, American ideology, American Legislative Exchange Council, anti-communist, Apple's 1984 Super Bowl advert, artificial general intelligence, autonomous vehicles, basic income, Bernie Sanders, blue-collar work, Bonfire of the Vanities, bonus culture, Burning Man, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, centre right, computer age, coronavirus, corporate governance, corporate raider, COVID-19, Covid-19, creative destruction, Credit Default Swap, cryptocurrency, deindustrialization, Donald Trump, Elon Musk, ending welfare as we know it, Erik Brynjolfsson, feminist movement, financial deregulation, financial innovation, Francis Fukuyama: the end of history, future of work, game design, George Gilder, Gordon Gekko, greed is good, High speed trading, hive mind, income inequality, industrial robot, interchangeable parts, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, Jaron Lanier, Jeff Bezos, jitney, Joan Didion, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, knowledge worker, low skilled workers, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, Menlo Park, Naomi Klein, new economy, Norbert Wiener, Norman Mailer, obamacare, Peter Thiel, Picturephone, plutocrats, Plutocrats, post-industrial society, Powell Memorandum, pre–internet, Ralph Nader, Right to Buy, road to serfdom, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, Saturday Night Live, Seaside, Florida, Second Machine Age, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Stewart Brand, strikebreaker, The Death and Life of Great American Cities, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, union organizing, universal basic income, Unsafe at Any Speed, urban planning, urban renewal, very high income, wage slave, Wall-E, War on Poverty, Whole Earth Catalog, winner-take-all economy, women in the workforce, working poor, young professional, éminence grise

I suspect that the immense power of the computer is being harnessed to this paper economy, not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges…facilitating nth-degree speculation which is short-sighted and inefficient. I love his phrase nth-degree speculation. It covered the range of obsessive-compulsive financial speculation that would be enabled by computers and the Internet, from the mania for derivatives in the late twentieth century to high-speed trading in the twenty-first. With more and more people suddenly in the business of buying and selling stocks for a living, digital technology enabled more and more stock to be bought and sold, an order of magnitude increase in the scale of that churn between the 1970s and 2000. “What is clear,” Tobin concluded in 1984, “is that very little of the work done by the securities industry” these days “has to do with the financing of real investment in any very direct way


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

In a 2009 speech, John Thain, the former CEO of the New York Stock Exchange who’d become CEO of Merrill Lynch, admitted as much. “To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. Creating things that you don’t understand is really not a good idea no matter who owns it.” In short, both high-speed trading and complex derivatives tilt financial markets away from human control and understanding. But they do more than that. They have cut their anchor to the human economy of real goods and services. As Bill Janeway noted to me, the bursting of what he calls the “super-bubble” in 2008 “shattered the assumption that financial markets are necessarily efficient and that they will reliably generate prices for financial assets that are locked onto the fundamental value of the physical assets embedded in the nonfinancial, so-called real economy.”


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

Whereas Morgan had searched for complex nonlinear patterns and found little of interest, Shaw quickly identified promising anomalies. Much as with the Simons team, the ghosts that Shaw discovered were hard to explain: When he found recurring patterns and printed them out, there were no familiar terms that could be used to make sense of the squiggles on the paper. The effects were so far from being intuitive that Shaw had no need for high-speed trading systems: He did not need to get orders to market faster than rivals because he was confident that he would have none.10 Pretty soon, the profits started to roll in, and Shaw outgrew the premises in Greenwich Village. He moved to a loft in the Flatiron District in 1989 and then to a futuristic tower on West Forty-fifth Street two years later; meanwhile, Morgan Stanley’s frustrated bosses closed down the Analytical Proprietary Trading unit.


pages: 677 words: 206,548

Future Crimes: Everything Is Connected, Everyone Is Vulnerable and What We Can Do About It by Marc Goodman

23andMe, 3D printing, active measures, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, airport security, Albert Einstein, algorithmic trading, artificial general intelligence, Asilomar, Asilomar Conference on Recombinant DNA, augmented reality, autonomous vehicles, Baxter: Rethink Robotics, Bill Joy: nanobots, bitcoin, Black Swan, blockchain, borderless world, Brian Krebs, business process, butterfly effect, call centre, Charles Lindbergh, Chelsea Manning, cloud computing, cognitive dissonance, computer vision, connected car, corporate governance, crowdsourcing, cryptocurrency, data acquisition, data is the new oil, Dean Kamen, disintermediation, don't be evil, double helix, Downton Abbey, drone strike, Edward Snowden, Elon Musk, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, future of work, game design, global pandemic, Google Chrome, Google Earth, Google Glasses, Gordon Gekko, high net worth, High speed trading, hive mind, Howard Rheingold, hypertext link, illegal immigration, impulse control, industrial robot, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Jaron Lanier, Jeff Bezos, job automation, John Harrison: Longitude, John Markoff, Joi Ito, Jony Ive, Julian Assange, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kuwabatake Sanjuro: assassination market, Law of Accelerating Returns, Lean Startup, license plate recognition, lifelogging, litecoin, low earth orbit, M-Pesa, Mark Zuckerberg, Marshall McLuhan, Menlo Park, Metcalfe’s law, MITM: man-in-the-middle, mobile money, more computing power than Apollo, move fast and break things, move fast and break things, Nate Silver, national security letter, natural language processing, obamacare, Occupy movement, Oculus Rift, off grid, offshore financial centre, optical character recognition, Parag Khanna, pattern recognition, peer-to-peer, personalized medicine, Peter H. Diamandis: Planetary Resources, Peter Thiel, pre–internet, RAND corporation, ransomware, Ray Kurzweil, refrigerator car, RFID, ride hailing / ride sharing, Rodney Brooks, Ross Ulbricht, Satoshi Nakamoto, Second Machine Age, security theater, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, smart meter, Snapchat, social graph, software as a service, speech recognition, stealth mode startup, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, Stuxnet, supply-chain management, technological singularity, telepresence, telepresence robot, Tesla Model S, The Future of Employment, The Wisdom of Crowds, Tim Cook: Apple, trade route, uranium enrichment, Wall-E, Watson beat the top human players on Jeopardy!, Wave and Pay, We are Anonymous. We are Legion, web application, Westphalian system, WikiLeaks, Y Combinator, zero day

Chapter 16: Next-Generation Security Threats: Why Cyber Was Only the Beginning 1 “had become so fragmented”: Nina Golgowski, “ ‘Syrian Hackers’ Tweet FALSE Report of Explosions at White House and Send Panicked DOW Jones Plunging 100 Points,” Mail Online, April 23, 2013; Jim McTague, “Why High-Frequency Trading Doesn’t Compute,” Barron’s, Aug. 11, 2012; Shan Carter and Amanda Cox, “One 9/11 Tally,” New York Times, Sept. 8, 2011; Doug Stanglin and David Jackson, “Timeline of AP Hacking, Reaction,” USA Today, April 23, 2013; Will Oremus, “Would You Click the Link in This Email That Apparently Tricked the AP,” Slate, April 23, 2013; Tom Lauricella, Kara Scanell, and Jenny Strasburg, “How a Trading Algorithm Went Awry,” Wall Street Journal, Oct. 2, 2010; Bernard Condon, “Stocks Stumble After a Fake Tweet Announced White House Attack,” Associated Press, April 25, 2013; Nick Baumann, “Too Fast to Fail: Is High-Speed Trading the Next Wall Street Disaster?,” Mother Jones, Jan/Feb. 2013. 2 The legendary Silicon Valley entrepreneur: Vinod Khosla, “Do We Need Doctors or Algorithms?,” TechCrunch, Jan. 10, 2012. 3 Today, artificial intelligence e-discovery: Rachael King, “Artificial Intelligence May Reduce Soaring E-discovery Costs,” CIO Journal, Oct. 29, 2013. 4 Just one algorithm alone: Amy Biegelsen, “Unregulated FICO Has Key Role in Each American’s Access to Credit,” Center for Public Integrity, May 17, 2011. 5 In a study: Adam D.