“Pop quiz, hotshot. There’s a bomb on a bus. Once the bus goes 50 miles an hour, the bomb is armed. If it drops below 50, it blows up. What do you do? What do you do?” – Dennis Hopper talking to Keanu Reeves in the movie “Speed”
That was a good movie. Speed. It’s all about speed now in the trading world. We are constantly reading articles about the “insatiable” need for speed on Wall Street. We read one yesterday in the FT titled “Tibco moves trading into nanoseconds“. Apparently, TIBCO just took the lead in the Wall Street speed race and is now measuring latency in nanoseconds. That’s billionths of a second for all you turtles out there who still are operating in microseconds. From Tibco’s web site:
“Performance benchmarks have demonstrated average end-to-end one-way application latencies of 384 nanoseconds for intra-host communication using shared memory transport and 3.1 microseconds using RDMA transport over InfiniBand.”
We have no idea what this means but it sure sounds fast. With all the manpower and cost involved, this need for speed must be helping everyone. Speed must be helping to shrink spreads and add liquidity, right? But we thought those HFT geniuses had already done that when they were operating in microseconds. So, why the need to get even faster? Every article will talk about the need for speed but what they won’t talk about is why it is needed.
The answer is simple: speed is relative. The HFT’s have to continue to beat each other which means continuing to reinvest all those profits that they are skimming from the institutional and retail investors to make sure they can keep skimming those profits in the future. Vendors like Tibco sure must be happy about this.
But what are these guys really doing and is it really necessary? According to Michael Spence, former Stanford School of Business dean and winner of the 2001 Nobel Memorial Prize in Economic Sciences, HFT is not necessary. In fact he says it should be banned altogether. In a recent article (Read article here), he had this to say about HFT:
“I would ban high speed trading– the automated, computer-driven trading of large volumes of financial assets in a short time frame by introducing lags in the trading process or increasing capital requirements or both. As far as I can see, it is entertaining, but it‘s largely a zero-sum game, using resources, contributing potential volatility in markets. The economic benefits in terms of enhancing the pricing, capital allocation and risk spreading functions of the financial system, seem negligible.”
He pretty much says that HFT adds no value to the trading process and is not needed. We couldn’t agree more.
Pop Quiz, HFT. There’s latency in your system. Once the latency goes above a millisecond, you lose. If it drops below a microsecond, you’ve accomplished no value added to the trading process. What do you do, SEC? What do you do, SEC?