Trading in picoseconds

[oddstrader]

Trading in picoseconds proves that not all science makes world a better place

By Matthew Lynn
Thursday March 17 2011
WHAT'S the right length of time to own a share? Ten years, perhaps? Five? Or maybe it depends on the company whose shares you are buying.

But seconds, or milliseconds, or even picoseconds?

New trading technologies are making it possible to buy and sell stocks in ever tinier fractions of time.

Trading in picoseconds is madness. It makes the stock market more volatile and less useful for companies to raise capital or for investors to earn returns.

In the UK this month, the technology company Corvil, which includes London Stock Exchange and Deutsche Boerse among its customers, created a stir by predicting that new frontiers in trading speeds were about to open up.

"There are no technological limits preventing firms from trading in picoseconds," CEO Donal Byrne said.

For those of us who get our picos mixed up with our nanos, a picosecond is one trillionth of a second.

Or, put another way, a picosecond is to one second what one second is to 31,700 years. In other words, it's a really, really brief period of time.

It's questionable whether it is possible for the buy-and-sell instructions to move fast enough.

Depending on the location of the computers involved, the messages may need to travel faster than the speed of light, which is 186,000 miles per second. Albert Einstein would scoff at the idea.

But why would anyone want to trade that quickly even if it can be done? And should they be allowed to?

For decades, there has been a clear trend for trading to become more and more frantic, and for the owners of equities to hold them for less time. In 1940, Amercian investors held their stocks for about seven years, according to Andrew Haldane, an executive director at the Bank of England.

That figure changed very little until the mid-1970s. By 1987, it had dropped to two years. By 2000, it was less than one year, and by 2007 less than seven months.

Much the same is true of our neighbours in the UK. In the mid-1960s, the average share was owned for five years. It was down to two years by the 1980s. Now it is slightly more than seven months, Haldane said in a speech last year.

Seven months may soon seem like several lifetimes. The technology is available to enable speculators to buy and sell a share within fractions of a second. But is that really progress?

A stock market has two core functions. It exists for companies to raise capital needed to invest in their business.

And it should help ordinary people to make a decent return on their savings by investing in those enterprises.

As the length of ownership has come down, have the markets gotten better at that? It is hard to argue that they have. If anything, it has made the markets less stable.

Many people blamed high-frequency trading for the "flash crash" plunge in share prices on the New York market last year.

Trading equities in fractions of a second is crazy. What can possibly change about the prospects of Vodafone or Nestle in the space of a picosecond?

Is their business really any different at the end of any particular fraction of a second than it was at the beginning? If you want to change your mind about owning their shares, maybe you should take a second to think it over. Maybe a whole minute -- or even two.

In reality, as shares have been traded more furiously, the stock market has become more volatile, more disruptive and less useful.

Sure, it might allow one high-frequency hedge fund to steal a march on another one.

But at a certain point you have to step back and ask whether this is a road we really want to go down, and whether it performs any useful function.

Whether Corvil comes up with its picosecond trading technology doesn't matter much. Someone probably will soon. Information technology makes everything faster and faster all the time. If it can be done, it will be done.

But not all science makes the world a better place -- and trading in picoseconds certainly falls into that category.

Just because we can build nuclear weapons doesn't make it a good idea for every country to have a big pile of nukes. And just because we can clone ourselves doesn't mean the world would be improved if we did.

The trading systems we have are fast enough for any reasonable purposes.

The stock exchanges should call a halt; and tell the traders that if they only want to hold their investments for a picosecond, they might be better off going somewhere else. Like a racetrack.

Matthew Lynn is the author of 'Bust', a book on the Greek debt crisis.

- Matthew Lynn

[gutuami]

“When one door closes another door opens, but we so often look so long and so regretfully upon the closed door, that we do not see the ones which open for us.”
- Alexander Graham Bell -

[SpikeyBob]

looking on the bright side, you could do a full day's worth of trading in approximately 30 nano seconds (if 1 pico sec was equivalent to 1 sec) ... would leave loads of time left for Call of Duty

[Predicton]

Lol, or going through the open door at the dole office

[Euler]

Super-fast traders feel heat from competition

http://www.ft.com/cms/s/0/94fbaa3a-66c4 ... z1JcmsbNfJ

[superfrank]

Super-fast traders feel heat from competition

http://www.ft.com/cms/s/0/94fbaa3a-66c4 ... z1JcmsbNfJ

HFT eats itself.

This quote is priceless...

Mr Smith says: “Now speed is not the issue any more. The reality is you need to have some sort of model that sees what everyone else doesn’t, some predictive element.”

Really?!!

[Iron]

It would be interesting to know whether Betfair engage in High Frequency Trading on the exchange.

The only thing that would prevent them from doing so is their sense of fair play...

Jeff

[Innertube]

Betfair tried to introduce cross matching without telling people. Shortly afterwards they had to admit they had implemented it in a way that made them money. I don't anything is beyond them. Why do you think they did it on horse racing, there biggest market?

http://www.gamblingcommission.gov.uk/gh ... r_and.aspx

[Iron]

You don't post as Badger on another forum, do you?

At the risk of sounding like a sad loser, I have to wonder whether someone is sending trolls into the forum...

Jeff

Is this for real?

I thought it was only sad losers who made such comments.

[Bet Angel]

Yes, it's fairly obvious there have been some trolls sent in here recently, as in the past, but
to clarify 'payuppay' is a genuine user. Genuine debate will always be encouraged.

[Iron]

Betfair tried to introduce cross matching without telling people.

Yes, I noticed - when you Google 'cross matching Betfair', you don't get anything published by Betfair this year!

But presumably Betfair wouldn't have given their customers a new facility if they didn't want anyone to know about it. So my guess is that it's a case of typically poor communication on Betfair's part, rather than anything cloak and dagger.

Jeff

[Iron]

I don't have a problem with genuine debate, but personal attacks just lower the tone of the forum.

Payuppay didn't attempt to address the point I made - s/he just implied that I was a sad loser.

One of the reasons I enjoy posting in this forum is because the tone is generally very pleasant and constructive, even when people disagree. Posts like Payuppal's detract from that...

Jeff

Genuine debate will always be encouraged.

[rubysglory]

You raise an interesting point about Betfair an their potential Trading activities Jeff - HFT or otherwise. Does anyone know if they trade the market themselves ? I have often thought that they were playing the 1.01 lay markets and were loading the queue before the public BOTs could be programmed to place their wagers. Anyway, keep up your posts Jeff. Some are good, some not so, but you,like others,keep the forum ticking over. Seriously though, between trading and web surfing, do you ever sleep ?

rg

[Iron]

Does anyone know if they trade the market themselves ?

I once read somewhere that they do, although apparently they don't use any insider knowledge.

But even so, if true, it's a conflict of interest to be an honest broker and a buyer/seller simultaneously!

Anyway, keep up your posts Jeff. Some are good, some not so, but you,like others,keep the forum ticking over.

I'm not sure whether or not to be flattered!

Which are the ones that are not so good? I don't mind the criticism, btw - I welcome constructive feedback.

Seriously though, between trading and web surfing, do you ever sleep ?

[rubysglory]

Just because I don't enjoy every posts that everybody makes does not mean they are not good posts for someone else. Keep on keeping on m8. Don't know where you get the energy for it all though ! Pheew - tired just thinking about it ! LOL .

rg