Thursday, June 10, 2010

Traders don't know jack (about technology)

As I was driving home today I caught a story on NPR about the practice of high frequency trading, or HFT. For those of you who don't know, HFT in a nutshell is some (supposedly, we'll get to this in a second) clever guys writing custom software that makes stock trades in microseconds based on trading volumes and such. The idea is to make fractions of a penny billions of times. It is an interesting topic and for more you should listen to the story.

What caught my ear though is they begin talking about the new server farm the NYSE is building in New Jersey that will handle all its transactions. The story then goes on to talk about how the HFT people are falling over themselves trying to get office space as close to the NYSE building as possible or, even better, inside the building itself. It is explained that the closer to the NYSE servers these guys get the faster their programs can communicate with the NYSE and thus lead to better informed trades.

If you're a computer scientist something should sound amiss there. Closer to the NYSE servers makes your trades go faster? Buzzzz wrong! This is most definitely true if you have a direct connection to the NYSE but I am assuming these guys don't, they're using the internet like the rest of us. This means their information packets have to go from their computers, out to their service provider to get routed, to bouncing around the interwebs, and finally come shooting back to the NYSE which is only a few feet away from the original computer. Cell phones work in a similar manner, so if you're not a tech person and want a more concrete example get someone in the same room as you and call their cell phone from yours. Note the delay between when the person says something and when you hear it coming through the phone. It takes time for the voice to travel from the phone, to a tower, go through some routing and other towers, and then to the other phone, which is analogous to how internet traffic bounces around.

So, Wall Street proves its stupidity yet again. I think I'll invest with the guys that are building their office next to their ISP.