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back to article Industry group blames 'outdated' kit for stock-market tech disasters

A US trade association for the stock market industry has called for an overhaul of the "outdated" technology systems that exchanges used for their share trading. The Securities Industry and Financial Markets Association (SIFMA) also told the Securities and Exchange Commission (SEC) that it was imperative that brokers, dealers …

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Bronze badge
Pint

time stamps..

perhaps eliminating this crazy dependence distance from the exchange would be a good thing.

How about cryptographically signed bids with a timestamp, and evaluation every <reasonable time increment>?

I know little about this, but it appears rather silly...

P.

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Re: time stamps..

How do you ensure that everyone is running to exactly the same time standard?

Exchanges have always been about bid and offer. Someone either bids a price that they want to pay or offers a price they want to sell at. The price will change until someone hits the deal, ie they commit to the price of the other party. First one in gets the deal, so the precise time the deal is hit becomes important. The issue with your solution is that it doesn't deal with multiple parties all hitting at the same price.

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Re: time stamps..

The speed of the reconciliation is critical in stock market trades (as the next deal's value depends on it), so reconciled timestamped/hashed logs just shifts the problem.

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Re: time stamps..

How about regression to trade by telegraph; speed isn't the cure - it's the PROBLEM.

Or add random delays for all. "All trades degusticator processed."

(Always wondered what a degusticator was.)

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Unhappy

Better Idea

Put an end to this stupid millisecond nonsense

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Re: Better Idea

>>Put an end to this stupid millisecond nonsense<<

How? Trade in whole seconds when there may be multiple buys and sells all trying to process on the 'beat'?

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Re: Better Idea

I really don't see why not. All the commodities they're trading around have artificial limits placed on them. Seems only fair that the traders who lobby for and benefit from those artificial limitations have some imposed on them. They rally around the need for 'stabilized pricing' but don't have a problem destabilizing the entire system trying to take advantage of the roadblocks they erected.

Yep, fuck 'em.

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Re: Better Idea

No. Make HFT (high frequency trading) illegal. Make front running and flash trading illegal. A stock exchange should be where buyers and sellers meet, not where disgusting parasitical spivs can harvest the wealth of legitimate market users.

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Re: Better Idea

Front running and flash orders are already illegal.

HFT covers many strategies. I agree some seem to offer little benefit other than to the trader employing them, such as momentum trading where instruments are traded rapidly to take advantage of a moving price. However the gains today are a lot smaller than people think, often not covering the infrastructure costs required to execute them.

However many other HFT strategies, such as rapid hedging and inter-venue trading have been shown to reduce risk and improve prices.

Electronic trading is here to stay, I agree it needs to be regulated, but let’s not throw the baby about with the bath water.

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Re: Better Idea

It agree, electronic trading isn't going away. For better or worse, we're stuck with it. If nothing else the science involved HFT has a lot of stack on benefit for computing in general.

I just think it's more than a bit disingenuous that the same groups who manipulate people's ability to produce goods in a competitive way are so dependent of fractions of a second. They whine that things aren't moving fast enough, but they've retarded the speed of natural resource harvesting and production so much that it has a negative impact on consumer pricing.

I have no sympathy for people who create performance roadblocks for others but complain about having to deal with roadblocks themselves.

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Re: Better Idea

I think the economy would work pretty well if shares could only be bought and sold once a week. Any faster than that is just gambling, and either burning money or else giving it to people who haven't done any work to earn it.

I'm not sure if that also gets rid of the sort of trading where you make money by driving a stock down and a perfectly good company out of business.

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Re: Better Idea

"Over that time, markets have evolved dramatically through the processing power of today’s technology – with execution times measured in milliseconds and microseconds – as well as widespread retail investor participation in the markets, decimalisation, the exponential growth of daily trading volume, and the for-profit status of the securities exchanges."

Most people raging against HFT have a picture of electronic trading that is somewhat unrelated with reality.

The speed of transaction has been driven up by many factors that have little do with people making money from micro price movements. Admittedly HFT has seen a lot of purely parasitic trading in the past, however through regulation and exchanges changing their pricing structures to discourage huge volumes of un-matched trades being blasted through their infrastructure, this activity has declined sharply.

The move away from open out-cry exchanges (loud wide-boys in loud jackets trading by shouting and hand signals) to electronic trading had allowed more transactions to be completed per trading day. This has allowed decimalization of the market, so before when shares or instruments could only be trading in large lots, typically 100,000 of whatever you were trading.

Trades can now be performed for any volume and matched against a counter-party directly as a partial fill. This has been made possible by the speed and accuracy of electronic systems.

By removing the need to have chains of brokers to aggregate investor traders in lots, this makes it practical to facilitate direct market participation by small and retail investors.

Before if I wanted to invest in something, I would by unlikely to afford a standard lot (100,000) of whatever, so I would go to a broker, they would look at their house book, if they had the shares in their inventory they would sell me a number of shares at a price that results in a profit for them, otherwise they would buy a lot on the market and sell me the required quantity, they would of course change a premium on their purchase price to cover their commission and risk (they would be left holding the remaining shares).

Also instead of a few national exchanges there now a multitude of exchanges, MTFs and ECNs (all really the same thing at a basic level, but there are different regulatory rules).

These private exchanges need liquidity for attract customers, so they bring in traders called Market Makers, these folks are obliged to provide a bid/ask price within a certain spread for all the instruments they are contracted to 'make the market' for, an exchange will have multiple market makers all competing against each other for trader business so the real time competition between market makers has. dramatically reduced bid/ask spreads.

Most of the the responsibility for the credit crunch was down to misrepresentation of their credit risk by banks, and had nothing to do with electronic trading, high frequency or otherwise. Of course HFT is not generally understood, so it makes a good scape goat.

Banks begrudgingly accept it is there and they have no choice. HFT has already resulted in significant removal of middle men from the trading business, and threatens the banks oligopoly by allowing greater market participation.

Politicians always need something to blame other than themselves, so rather than admit to massive regulatory failure in credit markets, they would rather blame something few people understand.

In my view the benefits of high performance electronic trading out weight the downsides.

I await your down-votes.

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Re: Better Idea

>>Put an end to this stupid millisecond nonsense<<

How? Maybe insist that all trades are input by a human being. Computers alllowed as advisors, but not permitted to enter directly.

Would destroy anything based on high-speed decision-taking and ultra-high leverage. The first, because a human can't input a trade in less than a few seconds. The latter, because the risk from fat-fingering it would be too great.

Just because something can be done does not mean that it should be done. Trading faster than a human being possibly could is one of those things. Doing so with ultra-high leverage puts the stability of our entire financial system at risk.

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Re: Better Idea

I don't typically agree with Don, but for this one he's spot on.

In fact, I'd let the sub-second traders time stamp their bids accordingly, but at the exchange the prices gets set every second. You take the whole range of sub-second trades, randomize the processing order and process until all matched orders are filled, and post the new price.

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Re: I await your down-votes.

Not a down vote so much as a nit. While some banks did misrepresent their risk, I think the bulk of them were just fuzzing the numbers the way the government told them too. But you noted political blame later. I put it all down to political blame, mostly in the form of the politicians wanting to give free stuff to people, not wanting to pay for it, and setting up the bankers as the fall guys.

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Anonymous Coward

Re: Better Idea

As far as i'm aware, and i might be wrong - but the orders are timestamped when they hit the exchange rather than when they are input to the OMS, that's why latency is important.

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Enough, already.

The kit is not 30 years old. The design is.

OK the design probably needs to be updated, but the way this is written suggests that the exchange is still running on kit bought when the IBM PC/AT was the benchmark PC!

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How about

The exchanges _deliberately_ introduce jitter into the switches to make life harder for the racing traders?

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Re: How about

The HFT boys already use multiple independent links to the exchange, and FPGAs to figure out which link has delivered details of a given price quickest and discard the same from the other links. Jitter won't work.

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Fixed it for you

"as well as widespread retail investor participation in the markets, decimalisation decriminalization, the exponential growth of daily trading volume"

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Re: Fixed it for you

"as well as widespread retail investor participation in the markets, decimalisation decriminalization, the exponential growth of daily trading volume"

Are you saying trading in small volumes should be illegal, that if you can't afford 10,000 or 100,000 shares you have no business trading directly on the market, and should be forced to go through a small number of brokers?

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Perhaps daily cocaine tests would avoid another crash.

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Trading fees would slow this down

A fee on trades would mean your projected win has to be higher than the fee before you trade. This might slow millisecond trading and pay for the improved infrastructure.

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Can we help?

Perhaps some sort of charity appeal could be launched to allow the traders and exchanges to update their systems?

Have they tried holding a bake sale?

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Introduce some damping

From an engineer's perspective, this looks a lot like an undamped system, in which a multitude of small inputs can amplify resonances, resulting in large swings which can ultimately destroy the device. (Have you checked your car's shock absorbers lately? :-) From what I read above, comparing bids and asks every second sounds perfectly reasonable.

Any attempt at millisecond trades would be pointless. If one person entered a multitude of bids and asks at sub-second intervals, the result would be worked out only on the tick, matching offers in first-come, first-served order. Sales (and price changes) would occur only once a second, preventing the out-of-control swings requiring shutting down a market. Of course, you'd have to introduce some jitter in the timing (say, make the tick a value between 0.8s to 1.2s, varying randomly) to prevent people from trying to game the tick. And each instrument would have its own clock---you don't want to update every issue on the market at the same instant.

As is probably evident, I'm no trader. If there's a better way to add damping, go for it, but the cost of missed opportunity at the millisecond would be more than repaid by avoiding the cost of a market crash. (At least to society at large. I feel no pain at the traders' making a fraction less than the current system offers.)

I can hear the screams now: ``But..., but..., you're introducing, *gasp*, _inefficiency_ into the market!'' No fecal material, Sherlock. Your shock absorbers dissipate some of the engine's power, introducing inefficiency, too. But where's the efficiency in hitting a tree because your wheels were bouncing wildly?

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Re: Introduce some damping

"From an engineer's perspective, this looks a lot like an undamped system,"

It is - and economists are NOT engineers.

The whole HFT setup is simply a fancy name for high-stakes gambling - which would be alright if there haven't been so many attempt to socialise the losses and privatise the gains.

Granted, stockmarket rading is all a form of gambling, but HFT in particualar is the kind of thing which - if the exchanges were run like real casinos - would result in the gamblers concerned being permanetly banned from Vegas/

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Re: Introduce some damping

What Terry Cloth said.

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If I recall correctly

messing with the ability of exchanges to manage volume is a key strategy in high frequency trading activities.

I don't remember exactly how, but essentially putting in massive buy and sell orders that you have no intention of fulfilling is a way to identify areas of weakness that can be exploited for quick profits.

Unless I'm wrong about that, it tells me two things:

a) High frequency trading really has no benefit to the economy and so we shouldn't tolerate, much less facilitate it. The instability it creates in markets feels like it actually increases price volatility and risk rather than decreasing it. That makes it as socially useful as burglary.

b) Even if I'm wrong and there are good reasons to facilitate HFT, if a key goal of their algorithms is to find and take advantage of flaws in the system to create volatility then any improvements are likely to lead to an arms race in which they build bigger and more powerful systems to try to stay ahead (and then presumably complain again that the market isn't fast enough and that more should be invested). I see no benefit to anyone except the large banks whose competition from smaller HFT players would be limited by the spiraling cost of these systems. Meanwhile trading costs would soar to pay for the infrastructure and Main Street would see no benefits.

I'm as capitalist as they come, but I see no benefit to either market competition or allocative efficiency in the modern 'faster than the eye can see' stock markets.

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Re: If I recall correctly

"I don't remember exactly how, but essentially putting in massive buy and sell orders that you have no intention of fulfilling is a way to identify areas of weakness that can be exploited for quick profits."

The jargon term for this is flash orders (orders that only exist for milliseconds well away from the spread) , the intention being to either overwhelm the trading systems of other participants with data volume, or confuse their algorithms into thinking the markets is behaving differently than reality. In many jurisdictions flash orders are deemed a form of market manipulation and therefore banned.

Since flash order costs the exchange money in terms of having to build infrastructure able to handle this huge volume of orders that will never match, hence no commission for the exchange, most have introduced punitive charges of excessive volumes of unmatched trades. This mostly killed this behavior off before the regulators for involved.

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A return to sanity and normal time scales?

Many comments seem to be proposing some procedural way of avoiding those split-second races. Surely it's not beyond the wit of man to arrange a system where everything is delayed until the end of the day (or hour, or whatever time is considered best)? Maybe reconciliation could take place at the end of the chosen period. It does no one any good when the time scale of transactions gets further and further removed from that of normal human experience - indeed, it's simply scaling up the potential for disaster.

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