High Frequency Trading Is A Rube Goldberg Machine

A Rube Goldberg machine or device is a deliberately over-engineered machine that performs a very simple task in a very complex fashion, usually including a chain reaction.

The expression is named after American cartoonist and inventor Rube Goldberg. 

The dictionary describes a Rube Goldberg as “accomplishing by complex means what seemingly could be done simply.” 

The cartoon below is an example of a Rube Goldberg.  It is titled the “Self Operating Napkin.” 

After a spoon is raised to the mouth, a series of events happens, starting with pulling a string and ending with a pendulum swinging to have the napkin wipe the man’s chin. 

Pretty fancy machine to accomplish a simple task.

rube goldberg

Photo: Themis Trading

 The modern day equivalent of a Rube Goldberg machine is high frequency trading.  HFT is certainly an over engineered machine that performs a simple task (buy low, sell high) in a complex fashion.  Heck, we stumbled upon a blog recently where the author is explaining how to build a high frequency trading system (http://howtohft.blogspot.com/).  His first post started this way,

 “Fresh out of college, with no background in finance, I learned high frequency trading (HFT) first hand while bootstrapping my startup from nothing to trading tens of millions of shares daily for a billion-dollar hedge fund.  I’m starting this blog to discuss the technical challenges related to building world class HFT system, including developing the trading algorithms, handling the data feeds, building the high performance data structures, structuring the threading model, and designing the system for maximum reliability.”

 That sounds pretty complicated, right?  The author then goes on in detail on how to build a limit order book.  Here is a little sample:

 “The idea is to have a binary tree of Limit objects sorted by limitPrice, each of which is itself a doubly linked list of Order objects.  Each side of the book, the buy Limits and the sell Limits, should be in separate trees so that the inside of the book corresponds to the end and beginning of the buy Limit tree and sell Limit tree, respectively.  Each order is also an entry in a map keyed off idNumber, and each Limit is also an entry in a map keyed off limitPrice. “

 Wow, those HFT’s are real smart guys.  But what are they actually doing.  They are building complex systems with the end result of sniffing out institutional orders so that the can trade ahead for a small profit.  Yes, we know, that’s only one type of HFT, the predatory HFT.  What about the good type, you know the arbitrage?  Right, that’s where they build complex machines to detect price differences from a fragmented market with over 13 exchanges and 40 dark pools that may exist for only a few microseconds.  Or, to arbitrage two ETF’s that are trying to mimic the same index, like VWO and EEM.   Pretty valuable stuff with enormous social benefits, wouldn’t you say?

 We hear often how HFT hire the best and brightest PhD’s in financial engineering to write their complex code.  Each one of these PhD’s writes his own Rube Goldberg code and it is put together into one giant, complex machine with the simple goal of buying low and selling higher a few seconds later.  No rocket science here, no cure for cancer, not even a new IPad like gadget.  And remember, no thinking allowed.  Just follow the Rube Goldberg machine.  What a waste of talent.

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