vital part, from what I’m seeing.”
The problem, Jeff and Frank had realized from the beginning, was that understanding in detail how the Exchange worked was extraordinarily complicated. The professionals making their fortunes from Wall Street employed their own jargon, in part to convey ideas effectively but also to safeguard their propriety access to the lucrative trading system. Once stripped of the needless complexity, the system wasn’t that incomprehensible.
“Buy low, sell high” was still the lifeblood of trading. Computers and their role in the international market had caused that basic rule to become more complicated than ever, but it remained the essence of the Exchange. When someone wanted to sell, they offered the stock at a specific price. When someone wanted to buy, they listed the price they were willing to pay. Between them was a difference. When one party moved, the transaction took place, not physically off to the side of the trading pit as had occurred at one time, but with nearly unimaginable speed.
Algorithms zipped through the Exchange’s computers, searching for deals within the parameters the programmers had established. When a trade that fulfilled the parameters was found, it was made faster than the blink of an eye, with no human interaction.
The essence of this had always been to stand at the front of the line because there were always more buyers for deals at the right price than there were sellers. The logic was simple enough: More buyers at the listed price drove the price up. The stock available at a desirable price was gone before all the buyers were satisfied. Since getting to the front of the line was essential, the Exchange had a rule—the first to offer to buy was placed ahead of those to follow.
As there was more than one exchange in the world, stocks could be offered for sale or to buy at different prices at the same time. But like water seeking its own level, given time, every stock had but one price. The opportunity came when a delay existed in settling on that common price. In a process known as arbitrage, computers networked around the world reported differences in prices, and algos exploited discrepancies the instant they were discovered. HFTs made money if the difference was an increase in price, and most of them made money by short selling—that is, making money if the price fell. The difference was exploitable either way.
Those opportunities had always existed, but now with computers, they were hunted down as never before, and the chain of transactions took place at unbelievable speeds. This was the red meat for high-frequency traders and as a consequence accounted for a substantial majority of all trading activity, a percentage that grew with each passing month.
HFTs designed and unleashed more sophisticated programs than other trading systems. They paid for proximity to the Exchange’s hub engines to get themselves to the head of the line, beating out more remote competitors. They also possessed a comprehensive understanding of the market’s microstructure. No other traders understood exactly how the trading engines worked, precisely how trades were executed, how orders were prioritized—but HTFs did.
“I don’t know,” Frank said as they finished their meal. “It just seems to me that the stock market doesn’t work any longer, not in any logical way. It’s so complex and fragmented, no one’s got a clear understanding of how it functions. It doesn’t even seem to be about providing a marketplace where people can buy and sell securities. There’s all this other stuff going on all the time. It’s all smoke and mirrors, altered reality, like a video game. What’s scary is that I don’t think anyone understands all the new rules or the full extent and implications of this permissiveness. There used to be just a few kinds of trades and only a couple of places to make them. Now there are more than one hundred types of trades, and if you add the
The problem, Jeff and Frank had realized from the beginning, was that understanding in detail how the Exchange worked was extraordinarily complicated. The professionals making their fortunes from Wall Street employed their own jargon, in part to convey ideas effectively but also to safeguard their propriety access to the lucrative trading system. Once stripped of the needless complexity, the system wasn’t that incomprehensible.
“Buy low, sell high” was still the lifeblood of trading. Computers and their role in the international market had caused that basic rule to become more complicated than ever, but it remained the essence of the Exchange. When someone wanted to sell, they offered the stock at a specific price. When someone wanted to buy, they listed the price they were willing to pay. Between them was a difference. When one party moved, the transaction took place, not physically off to the side of the trading pit as had occurred at one time, but with nearly unimaginable speed.
Algorithms zipped through the Exchange’s computers, searching for deals within the parameters the programmers had established. When a trade that fulfilled the parameters was found, it was made faster than the blink of an eye, with no human interaction.
The essence of this had always been to stand at the front of the line because there were always more buyers for deals at the right price than there were sellers. The logic was simple enough: More buyers at the listed price drove the price up. The stock available at a desirable price was gone before all the buyers were satisfied. Since getting to the front of the line was essential, the Exchange had a rule—the first to offer to buy was placed ahead of those to follow.
As there was more than one exchange in the world, stocks could be offered for sale or to buy at different prices at the same time. But like water seeking its own level, given time, every stock had but one price. The opportunity came when a delay existed in settling on that common price. In a process known as arbitrage, computers networked around the world reported differences in prices, and algos exploited discrepancies the instant they were discovered. HFTs made money if the difference was an increase in price, and most of them made money by short selling—that is, making money if the price fell. The difference was exploitable either way.
Those opportunities had always existed, but now with computers, they were hunted down as never before, and the chain of transactions took place at unbelievable speeds. This was the red meat for high-frequency traders and as a consequence accounted for a substantial majority of all trading activity, a percentage that grew with each passing month.
HFTs designed and unleashed more sophisticated programs than other trading systems. They paid for proximity to the Exchange’s hub engines to get themselves to the head of the line, beating out more remote competitors. They also possessed a comprehensive understanding of the market’s microstructure. No other traders understood exactly how the trading engines worked, precisely how trades were executed, how orders were prioritized—but HTFs did.
“I don’t know,” Frank said as they finished their meal. “It just seems to me that the stock market doesn’t work any longer, not in any logical way. It’s so complex and fragmented, no one’s got a clear understanding of how it functions. It doesn’t even seem to be about providing a marketplace where people can buy and sell securities. There’s all this other stuff going on all the time. It’s all smoke and mirrors, altered reality, like a video game. What’s scary is that I don’t think anyone understands all the new rules or the full extent and implications of this permissiveness. There used to be just a few kinds of trades and only a couple of places to make them. Now there are more than one hundred types of trades, and if you add the
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