Friday, June 7, 2013

How the Robots Lost: High-Frequency Trading's Rise and Fall

From Businessweek:  ".....Steve Swanson was a typical 21-year-old computer nerd with a very atypical job. He spent most of his time in the garage of his college statistics professor, Jim Hawkes, programming algorithms for what would become the world’s first high-frequency trading firm, Automated Trading Desk. Hawkes had hit on an idea to make money on the stock market using predictive formulas designed by his friend David Whitcomb, who taught finance at Rutgers University. It was Swanson’s job to turn Whitcomb’s formulas into computer code. By tapping market data beamed in through a satellite dish bolted to the roof of Hawkes’s garage, the system could predict stock prices 30 to 60 seconds into the future and automatically jump in and out of trades. They named it BORG, which stood for Brokered Order Routing Gateway. It was also a reference to the evil alien race in Star Trek that absorbed entire species into its cybernetic hive mind.

Among the BORG’s first prey were the market makers on the floors of the exchanges who manually posted offers to buy and sell stocks with handwritten tickets. Not only did ATD have a better idea of where prices were headed, it executed trades within one second—a snail’s pace by today’s standards, but far faster than what anyone else was doing then. Whenever a stock’s price changed, ATD’s computers would trade on the offers humans had entered in the exchange’s order book before they could adjust them, and then moments later either buy or sell the shares back to them at the correct price…..

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