Thursday, September 17, 2009

Stock Market Manipulation By Millisecond Trading

A firm I worked with recently tore down an arbitrage network (they were getting out of the business as it was not core) which comprised of a great deal of Layer 2 dark fiber between sites in NYC and an external data center in NJ, Force 10 fabric switches with multiple paths to server clusters, and a great many Sun X-series servers running Linux. This arbitrage network bypassed the standard corporate (i.e. Cisco-based) network as they wanted exclusivity, higher bandwidth and as much speed as possible. Still, there were issues and the whole environment was scrapped since the actual returns did not match the expectations or cover the costs.

When I looked over the shoulders of the designers (they didn't want too much support from the regular network engineering team) they were concerned with raw performance and not as much with security or other daily operational issues. I would characterize it as the difference between, say, a NASCAR Sprint Cup car and your regular transportation. The former is purpose-built solely for performance while the other has to contend with safety requirements, daily functionality, and a lower common denominator for use.

The location of their server no longer matters as GS was allowed to put a peeker in line between everyone else (on the planet) and the publicly traded ETNS. They get an opportunity to front run every transaction. Every single one. Zerohedge is a financial blog that has been keeping up with this story. Their coverage is good if a little breathless.

The Securities and Exchange Commission is seeking to curb a practice criticized for giving an unfair advantage to some market participants who have lightning-fast computer trading software.

1 comment:

yogijp said...

The real issue the SEC is going to have to tackle is high-frequency trading - and flash and high-frequency are only slightly related. On that score, SEC Chairman Mary Schapiro has said the agency is exploring possible regulations for high-frequency trading, which involves lightning-fast electronic trades, and dark pools, which are private venues where large blocks of securities are traded anonymously.