drwex: (pogo)


The video shows half a second's worth of activity on the open (*) markets in the stock JNJ (Johnson & Johnson). The half-second of activity is stretched out to almost 6 minutes so you can comprehend it at human speeds.

Each node in the graph represents a marketplace (New York Stock Exchage, NASDAQ, BATS, etc). The shapes coming into the nodes from outside represent order activity: someone offering to sell or buy (commonly called 'bid' and 'ask') shares of JNJ on that marketplace, or cancelling/modifying their existing orders.

As each piece of order information hits the marketplace it then must update all its peers about this change in status. This is the distributed system part of the problem. Markets maintain what is called a "book" of bids and asks and will try to fill orders from their own books because they make money that way. The market operates with the acknowledged fiction that there is a unified picture of the book and something called the NBBO (National Best Bid/Offer). The NBBO is shown as the bottom box (called SIP) in this video.

The reason this is done is because if Market A has a better price (the NBBO) than you have on your book then you're supposed to route the order over to that market to be filled.

For fun, freeze the video at any random point and look at the differences in price. Because these are real data traveling over real wires between real computers there are always speed variances and thus each node has a different view of "reality" (and the NBBO) at any given moment in time.

There are 'fast' markets (good hardware, the best networking) and 'slow' markets. People try to go to the good markets for the best prices, but this real-world difference is an opportunity for arbitrage. If you know you can get something for a couple pennies less on a fast market and then turn around and dump it onto a slow market before that slow market's book catches up then you profit those pennies. A typical trade size is 100 shares, so if you did it right you just made $1-2 on that pair of trades. Do that hundreds of times per second and presto you're a high-frequency trader (HFT).

We also know that reality isn't smooth. What's a "fast" market at 9:37 might not be fast at 9:38. Some markets are fast in some symbols - well, faster - but not in all. So what you do is sample a lot of data and build statistical models that let you predict what's going to happen, with a certain likelihood. Statistical models don't work all the time but the laws of large numbers work in your favor. Do the same thing tens or hundreds of thousands of times a day and you'll average out ahead, assuming your model is good. Presto, you're a stat-arb (statistical arbitrage) trader.

This stuff gets treated like mystical mumbo-jumbo by the press, but it's really just the intersection of math and networking. Many of the best stat-arb traders in the world know nothing about stocks and markets, but they know a lot about Matlab and how to draw meaningful conclusions from noisy data.

The rest of us can just have fun watching the pretty lights.

(For absolutely full disclosure here it should be noted that although I no longer work in this industry I am still a tiny minority shareholder in the company that owns BATS. I get no financial compensation for publicizing this or any related informational activity.)
drwex: (Troll)
SCOTUS's decision this week (Citizens United v FEC) to overturn McCain-Feingold and remove limits on how large group entities(*) can buy politicians is a bad decision. However, it's not bad because it's bad legal decision-making. To be honest, I'm surprised it was as close as 5-4. It's bad because the decision rests on two fundamentally broken principles that have been worked into American jurisprudence for decades; the fatal collision we're now witnessing was inevitable.

1. In our law, corporations (and by extension certain other groupings) are people, with the rights of individuals including those First Amendment rights of free (which is to say, unfettered) speech.

2. Money is considered speech rather than property.

#1 is ridiculous on the face of it. Why are some forms of association (corporations) granted rights that other forms of association (glee clubs) are not? Why do associations get the rights of personhood without the liabilities? Corporations do not go to jail. You can sue or criminally charge a union, but your remedies are limited to the assets held by that union. If you want to go after the crooked president of the union you have to go a separate route.

#2 is less evidently wrong, but it's still wrong. Speech has a very strong set of protected rights in our system; property also has rights but they're more limited. If money is speech then a richer person has more right to speak than you or I, which breaks some basic notion of equality.

If you put 1 + 2 together it makes total sense that corporations should be allowed to spend their money just as individuals do, in the form of donations to politicians or buying political ads or producing Swift Boat smear campaigns, or telling people it's OK to chop down forests or any of the other excesses that McCain-Feingold was trying to rein in. The law makes no sense in light of those two principles, even though the law has a noble intent (reduce corruption in politics). For a law to make sense it would have to establish an overriding interest that the government has in abrogating the principles in 1 + 2. I haven't read the dissent in Citizens yet, but I'm pretty sure that's the line the dissenting justices took. (ETA: I've now skimmed it a bit and yes this is their argument; I'm also somewhat surprised that the majority reached out to overturn other precedents, but not really that shocked.)

To fix this it's not possible just to tinker around the edges. These principles will need to be overturned. One possible way that might be done (talk about your long shots) is by an amendment to the US Constitution. And lo and behold someone's actually trying to do that: http://www.movetoamend.org/we-corporations

In theory it's possible that you could constitute a SCOTUS that would recognize past error and overturn the precedents that Citizens rests on, but I rate that an even longer shot. Even grotesque scandals such as the Abramoff mess haven't motivated any fundamental changes, and both parties are quite thoroughly guilty of sucking down the dollars, giving them no motivation to change things. One reason McCain-Feingold got as far as it did was that the two main authors were both mavericks within their parties who could still command respect. In the end, though, it doesn't really matter. We get the politics and politicians we deserve - we throw out a few bad apples now and then but mostly watch idly as the cost of elections skyrockets and more and more money gets used to finance less and less real change.

(*) The most popular members of this category are indeed corporations, but this also applies to unions, PACs, special-interest groups like the NRA or AAA, sports teams, and similar groups.
drwex: (Whorfin)
SCOTUS's decision this week (Citizens United v FEC) to overturn McCain-Feingold and remove limits on how large group entities(*) can buy politicians is a bad decision. However, it's not bad because it's bad legal decision-making. To be honest, I'm surprised it was as close as 5-4. It's bad because the decision rests on two fundamentally broken principles that have been worked into American jurisprudence for decades; the fatal collision we're now witnessing was inevitable.

1. In our law, corporations (and by extension certain other groupings) are people, with the rights of individuals including those First Amendment rights of free (which is to say, unfettered) speech.

2. Money is considered speech rather than property.

#1 is ridiculous on the face of it. Why are some forms of association (corporations) granted rights that other forms of association (glee clubs) are not? Why do associations get the rights of personhood without the liabilities? Corporations do not go to jail. You can sue or criminally charge a union, but your remedies are limited to the assets held by that union. If you want to go after the crooked president of the union you have to go a separate route.

#2 is less evidently wrong, but it's still wrong. Speech has a very strong set of protected rights in our system; property also has rights but they're more limited. If money is speech then a richer person has more right to speak than you or I, which breaks some basic notion of equality.

If you put 1 + 2 together it makes total sense that corporations should be allowed to spend their money just as individuals do, in the form of donations to politicians or buying political ads or producing Swift Boat smear campaigns, or telling people it's OK to chop down forests or any of the other excesses that McCain-Feingold was trying to rein in. The law makes no sense in light of those two principles, even though the law has a noble intent (reduce corruption in politics). For a law to make sense it would have to establish an overriding interest that the government has in abrogating the principles in 1 + 2. I haven't read the dissent in Citizens yet, but I'm pretty sure that's the line the dissenting justices took. (ETA: I've now skimmed it a bit and yes this is their argument; I'm also somewhat surprised that the majority reached out to overturn other precedents, but not really that shocked.)

To fix this it's not possible just to tinker around the edges. These principles will need to be overturned. One possible way that might be done (talk about your long shots) is by an amendment to the US Constitution. And lo and behold someone's actually trying to do that: http://www.movetoamend.org/we-corporations

In theory it's possible that you could constitute a SCOTUS that would recognize past error and overturn the precedents that Citizens rests on, but I rate that an even longer shot. Even grotesque scandals such as the Abramoff mess haven't motivated any fundamental changes, and both parties are quite thoroughly guilty of sucking down the dollars, giving them no motivation to change things. One reason McCain-Feingold got as far as it did was that the two main authors were both mavericks within their parties who could still command respect. In the end, though, it doesn't really matter. We get the politics and politicians we deserve - we throw out a few bad apples now and then but mostly watch idly as the cost of elections skyrockets and more and more money gets used to finance less and less real change.

(*) The most popular members of this category are indeed corporations, but this also applies to unions, PACs, special-interest groups like the NRA or AAA, sports teams, and similar groups.

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