Banks and hedge funds hire high-priced computer engineers to write algorithms that can predict minor, transitory movements in the markets—for example, by continuously comparing the prices of stocks and derivatives. Then they place orders on the electronic exchanges, hoping to make a small amount per share. They rarely hold a position for long. Because companies’ algorithms are written to behave similarly, the way to make money in high-frequency trading is to get the order to the exchange ahead of the competition’s, by microseconds, which are millionths of a second. An electronic signal is transmitted from Cage 06504 to Cage 06505 a few hundred microseconds faster than an electronic signal is sent from Manhattan. Recently, James Barksdale, the first C.E.O. of Netscape, started a company called Spread Networks, which built a fibre-optic cable from New York to Chicago, in order to offer its customers a three-millisecond advantage in the time it takes an order to travel from one city to the other.
November 9, 2013
"Since 2008, the financial industry has changed the way it does business. Can the S.E.C.’s Mary Jo White control it?"
A great article in The New Yorker by Nicholas Lemann. Excerpt: