5:39 AM
Share trading goes hi-tech
INOLD days, stock market floor was populated by hundreds of jobbers called market makers in USA). To overcome the din and chaos they received visual clues from brokers in a strange language Floor of BSE n no different Market price was determined by jobbers depending on the relative buy and sell pressures Nowadays markets are made electronically with bid (buy) and ask sell queues maintained in a computer for each scrip Earlier buy and sell decision were made manually through fundamental analysis and technical analysis fundamental analysis is based on profitability projections based on anticipated anticipated economic technological factors and it is still valid for long range price prediction. Technical analysis is simply based on price chant.
The methodology of hiking buy or sell decisions can he classified inio 3 categories. First is die traditional manual method. Second is called algorithmic trading' (AT), where the decisions are taken and orders placed automatically by a computer program. A typical application of algorithmic trading is splitting a large order into series of small orders and executing them at proper times to minimize (he impact on market price. It got a boost in 1992 when NASDAQ in New York introduced FIX protocol for trade communication. It was then adopted by several other stock exchanges and now it has become the dc facto messaging standard in the global equity markets. Secondly, a special class of algorithmic trading is called "high-frequency trading' (HFT), Their success depends on responding to market cues and taking trading decisions fast. i.e. before others take diem. The HFT strategies are (a) predicting a short term bull/bear run from the bid-ask imbalance in the limit order book Ibt predicting a price movement of one security from another closcU related security, e.g. gold and gold F.TF and <e| quickly responding to electronically distributed events like car production figures from auto manufacturers' association, corporate result announcement elc. 1 he decision lime requirements have shrunk to a few milliseconds and so. ordinary computers are not sufficient for carrying out HFT. In 2012, nearly half the volume on US stock exchanges was accounted by HFT traders.
Current computing trends are use of Graphics Processing Unit (GPU) for computation or use special programmable hardware like Field Programmable Gate Arrays (FPGAs). One can use a combination of GPU and FPGA for ultimate results. Equally important are the high speed data links that connect die trader's computer to the stock exchange.
Current computing trends are use of Graphics Processing Unit (GPU) for computation or use special programmable hardware like Field Programmable Gate Arrays (FPGAs). One can use a combination of GPU and FPGA for ultimate results. Equally important are the high speed data links that connect die trader's computer to the stock exchange.
HFT is not without controversies. HFT is not human, so it lack commonsense To nuke decision 14m. HFT algorithms ignore not only commonsense but also fundamental and technical analysis. Sometimes this results in catastrophes.
Eric Budish of University of chicago describes acquiring HFT technology as arms lace. In 2010, a communication company called Spread Networks said out a straight line fiber optic cable to connect New York and (chicago at cost of $300 million. this replaced the earlier cable which zigzagged along railway lines and went around mountains It brought the round trip communication from 16 to 13 miliseconds. While Winking an eye lakes 400 milisecond 3 millisecond' dose not Seem much, especially relative to the speed at which fundamental information about companies and the economy evolves but a delay of 3 miliscconds can make or break an HFT trader in chicago HFT community is now pushing the limits of physics.
Jacob Loveless suggests using a fiber with low refractive index that will allow a higher velocity for light. Einstein said that nothing can travel faster than light in vacuum. The joke goes that the next project will be to dig a straight tunnel, avoiding earth's curvature and use free to air transmission. A competing microwave technology has further reduced round-trip transmission time to 8.5ms.
Traders in Frankfurt spent money on a new microwave link between London to Frankfurt that reduced the travel time by 40% compared to optical cable.
The ultimate solution is collocation, i.e. have the server in the same building or in proximity of the stock exchange. On May 6ih. 2010. The US's Dow Jt.no Industrial Average-Index was down by 300 points due to worries about debt crisis in Greece, but then it fell a further 6(H) points in five minutes between 14:42 and 14:47. effectively wiping M trillion from the value of the market. The incident is popularly known as 'Flash crash of 2010'. By comparison, the total cost of the September 11 attack on the World Trade Center-comprising earnings losses, property damage, and the cleanup and restoration of the site-is estimated to be between $33 billion and S36 billion. After investigations it turned out that the crash was triggered by a large sale order (75000) of E-mini S&P contracts which exhausted the number of available buyers. This was followed by HFT aggressively selling.
Knight Capital was a successful stock investing company. On 1st August 2012. it started live trading using their new Retail Liquidity Provider (RLP) market making software on the NYSE. Immediately they started losing millions of dollars a minute. It was forty-five minutes before the software was stopped, by which point Knight had hist a total of $440 million.
Citibank has announced that it will provide FIX functionality to NSE in India. In March 2013. Getco. one of the world's largest automated trading firms, became the first Western trading firm to gain approval to trade in India, the world's fastest growing derivatives market. It is likely that it will have an unfair advantage over local firms, at least initially. But it may prove to be a blessing in disguise. The technology is not capital intensive. GPUs are household items in video games. FPGAs are not that common but can be found in every engineering college. If Indian techies are introduced to the technology, they will outsmart everyone else.
Jacob Loveless suggests using a fiber with low refractive index that will allow a higher velocity for light. Einstein said that nothing can travel faster than light in vacuum. The joke goes that the next project will be to dig a straight tunnel, avoiding earth's curvature and use free to air transmission. A competing microwave technology has further reduced round-trip transmission time to 8.5ms.
Traders in Frankfurt spent money on a new microwave link between London to Frankfurt that reduced the travel time by 40% compared to optical cable.
The ultimate solution is collocation, i.e. have the server in the same building or in proximity of the stock exchange. On May 6ih. 2010. The US's Dow Jt.no Industrial Average-Index was down by 300 points due to worries about debt crisis in Greece, but then it fell a further 6(H) points in five minutes between 14:42 and 14:47. effectively wiping M trillion from the value of the market. The incident is popularly known as 'Flash crash of 2010'. By comparison, the total cost of the September 11 attack on the World Trade Center-comprising earnings losses, property damage, and the cleanup and restoration of the site-is estimated to be between $33 billion and S36 billion. After investigations it turned out that the crash was triggered by a large sale order (75000) of E-mini S&P contracts which exhausted the number of available buyers. This was followed by HFT aggressively selling.
Knight Capital was a successful stock investing company. On 1st August 2012. it started live trading using their new Retail Liquidity Provider (RLP) market making software on the NYSE. Immediately they started losing millions of dollars a minute. It was forty-five minutes before the software was stopped, by which point Knight had hist a total of $440 million.
Citibank has announced that it will provide FIX functionality to NSE in India. In March 2013. Getco. one of the world's largest automated trading firms, became the first Western trading firm to gain approval to trade in India, the world's fastest growing derivatives market. It is likely that it will have an unfair advantage over local firms, at least initially. But it may prove to be a blessing in disguise. The technology is not capital intensive. GPUs are household items in video games. FPGAs are not that common but can be found in every engineering college. If Indian techies are introduced to the technology, they will outsmart everyone else.
Posted in: News 2014
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