High Frequency Trading Neighborhood - Part I

As soon as hot summer arrives in Belgium, natural migration from French-speaking Wallonia to the west coast of the Flemish region of the country takes place. Here, à la mer du Nord [ fr. on the North Sea coast ], people relax on the white sandy beaches and ride the famous quad bikes (here called cuistax). The west coast of Belgium is the (sea) shelter of many, so I could not refuse the two relatives living here to spend a week with them a la mer du Nord . For the first time I decided not to take dozens of books with me, just one article under discussion with the heading “Can brokers get everything at once?”, But it was so hot that I decided to just drink mojito on the beach.

The only place I went to was the city of Veurne , a typical small Flemish town where I tried several local beers. A week later, I returned to Brussels, and on July 16, 2014, Bloomberg reported that a proprietary trading company in Chicago acquired an old tower in ... Verne for 5 million euros. What a coincidence!
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I studied high frequency trading (HFT) and wrote about it since 2012 and I am well aware of microwave relay lines [ microwave relay lines transmit microwave radiation ] that high frequency traders use, but I didn’t know that from January 2013, Jump Trading owns a tower in Belgium, near my home. Being in the center of the problem, from a geographical point of view, I decided to explore the radio-relay communication lines owned or used by large high-frequency traders here in Europe as my “extracurricular activities”. If Jump has a tower, competitors should be close by - the only question is where? I asked myself the question: “Can I find them all?”, And then my research began, or perhaps even an obsession. I discovered too many things to discuss in one post, so I divided the whole story into 5 parts. We will call this, the first part, “Mapping of HFT Communication Lines,” although the title “How I became an expert in the field of potato fields” would have been more appropriate.

From Chicago to Belgium or a brief history of the towers

The first part of my book was more about the “uprising of HFT machines” before and after the advent of the regulatory era of the US National Market System. Describing the phenomenon of the rapid growth of ECN-systems [ ECN - Electronic Communication Network, an electronic system for the purchase and sale of exchange goods that is trying to eliminate the role of intermediaries ], such as Island , I realized that the markets of Chicago in the light of the development of these technologies are more interesting than stories about Wall Street traders who profit from small order execution systems [ eng. SOES, Small-Order Execution System ]. Therefore, the second and fifth parts of the book are focused on Chicago, in particular, on the transition from the old stock pits to automated systems, which are now placed in huge data centers.

The history of the exchange in the City of Winds is a real concrete example for those who are interested in the automation of goods and financial markets. I wrote about the appearance of the telegraph in Chicago; the first telegraph tweet received in Chicago just three months before the appearance of the first exchange, the Chicago Board of Trade [ Eng. CBOT - the Chicago Board of Trade - ITinvest is working on providing access to the site ], was sent in April 1848. I even found the phrase “instant orders” [ eng. flash orders ] in a 19th century Chicago newspaper, which described the practice of using private telegraph lines by traders to buy goods whose prices, according to traders, had to jump in a few seconds, so that they could resell at a higher price what they bought in seconds earlier - familiar?

One can find many other interesting historical predecessors of modern practices. For example, long before the existence of towers with the transmission of microwave signals, similar to the one in Vern, the Chicago Board of Trade set its sights on owning a tower. Its first location was the tallest building in the city, and when in 1885 the exchange needed to build its own building, the building became the tallest in Illinois, as well as the first building of Chicago that runs on electricity. Frank Norris wrote about her in his novel “The Pit ”:

Illuminated office buildings, a shroud of rain, indistinct reflections in the sky and the pit of the Chicago Board of Trade towering above them, dark, gloomy, monolithic, leaning toward its base, like a giant sphinx with eyes closed, silent, gloomy - sneaked in without a single sound, without signs life, under the cover of night and floating veil of rain.

In the 1920s, board members voted to build a new building that would become a “temple of capitalism” and brought architects, traders and several leading telegraph companies to the discussion in order to find a way to improve the social space of the exchange pits. Traders were unhappy with excessive noise, and telegraph companies, such as Western Union and RCA, lobbied for the installation of high-speed communication lines. When the building of the Chicago Board of Trade was built on Jackson Boulevard not far from LaSalle Street, 4300 kilometers of telephone lines and 240,000 kilometers of telegraph lines were taken from it - the first step to the uprising of cars. It towered over Chicago until 1965, and a faceless statue of the goddess of fertility Ceres adorned the top of the building.

The heart of the exchange was a pit , and, accordingly, the latest achievements of technology were concentrated in it. The first exchange pit was patented by Ruben S. Jennings in 1878, and soon the Chicago Board of Trade began to build all sorts of pits without paying contributions to Jennings. The inventor tried to sue the Chicago Board of Trade, but lost, and his patent was invalidated by the judges. Jennings designed the stockhole so that one trader could see and hear the other well. For this reason, the pits have several steps; the trader, who sits at the highest level, has a better overview, and also has the advantage of being able to easily see and hear colleagues, and therefore make transactions faster, traders who are in the middle and lower parts of the pit. Speed ​​is crucial here.



Therefore, growth played an important role in increasing the speed. The growth of the trader has become an advantage, which is why some traders sometimes became former basketball players or football players: " higher traders are easier to see ." In the 1990s, some traders wore high heels, being in a hole to make transactions faster, and inevitably suffered injuries due to a lack of balance. This forced the Chicago Mercantile Exchange . CME - Chicago Mercantile Exchange ] in November 2000 to decide on setting the maximum height of the heel and / or platform to two inches.

The introduction of heel height standards was one way to equalize chances on the trading floor in terms of speed of work in the exchange hall. Not so long ago, the last site in Europe where open bidding is held is the London Metal Exchange [eng. London Metal Exchange], which is called the "Ring", fined traders for violating the rule according to which transactions can only be made by sitting:

Dealers who stand, create an unfair advantage and can block the review to other traders and members of the LME pricing committee, ”said the representative of the British Stock Exchange.

Computers are ahead of the person in speed, regardless of the height of his heels, so by the 1980s and 1990s computerization on the exchanges has grown extraordinarily. The story recorded by Donald McKenzie in the book “Mechanization Merc: Chicago Commodity Exchange and the Development of High Frequency Trading” [ eng. Merc - short for Chicago Mercantile Exchange ], describes, as it seems to me, a turning point in the transition between transactions performed by people and machines.

See also: Three very expensive milliseconds

After CTE released E-Mini contracts in 1997 [ E-Mini is a full-futures contract equal to 1/5 of the standard contract for the S & P 500 index ], the exchange built a semicircle platform above the pits on which the first terminal users Globex systems.

“This is how the high and low sitting people appeared,” writes McKenzie. “Arbitrage deals between S & P 500 futures traded in a trading pit and E-Mini contracts, which require five times less space to trade. Two cooperating traders - one in the pit, the other - sitting above the Globex terminal - gave signals to each other by hand or using radio headphones. ”

Hand signals used by traders known as arbitrageurs since the 1930s have been faster than shouting. Now these signals were sent up, as if trying to attract the attention of Ceres. The new “deity” was no longer a statue, but a faceless computer, and the name of the goddess began to be worn by the HFT-company Ceres Trading . Ceres - Ceres ].

One of the ex-traders of the CTL S & P 500, who worked in the trading pit, describes the work on the platform in an interview with McKenzie:

“When you entered the site, did you see towers towering above the S & P stock exchange pit? These ... almost reach the ceiling, and in each several people are sitting at the terminals? So, these guys are trading E-Mini ... Some do it very, very, very well, incredibly well. "

Please note that the ex-trader uses the word "tower" here, because many HFT companies were born on these platforms. Here began the founders of Getco [ eng. Global Electronic Trading Company ] Daniel Tirney and Stephen Schuler, but after rereading the McKenzie article, I found two more traders working with the Globex terminals on the tower: these were Paul Gurinas and Bill Disomma. The company they founded in 1999 was nothing more than Jump Trading. Even before the introduction of microwave links, the towers played an important role in trade. In the photo - Paul Gurinas, working in the pit PTB.

Microwave radiation and everything you need to know about HFT

Simply put, traders are algorithms, and exchanges are data centers. Many, if not all traders are placed at the same distance from the exchange engine, bringing buyers and sellers together. The search for pairs occurs in tens of microseconds. In this new HFT ecosystem, information — between two exchanges, for example — must move very quickly. This has led some HFT competitors to use faster technologies than fiber, the most advanced of which is microwave radiation.

Microwave radiation, generally speaking, is an old technology, besides, as it turns out, with significant drawbacks: it is unstable to rain and fog, has a limited bandwidth equal to 10% of the capabilities of the optical fiber, which makes it necessary to rewrite existing algorithms. However, microwave radiation offers both a faster start and a more direct route. No need to run fiber optic cable through the mountains, as Spread Networks did to cross the Alleghenies, according to an article by Donald McKenzie, Daniel Buenza, Juval Millo and Juan-Pablo Pardo Guerra.

Just install the antennas on the towers and find the shortest distance between point A and point B, everything. Market orders are transmitted faster through the air than through fiber optic cable underground. The map below shows the radio-relay links between the data centers of New Jersey and Chicago (if you want to learn more about the lines of communication between New Jersey and Chicago, read this article ):



Some radio relay links between New Jersey and Chicago. Image from McKay Brothers / Quincy presentation at Data Trading Show 2014

But remember that the earth is a ball. You can go from point A (stock exchange in New Jersey) to point B (stock exchange in Chicago), but you have to take into account the curvature of the Earth. Even using specially tuned antennas, you will have to reckon with nature (this is why, being an anthropologist, I spent a lot of time studying such communication lines: the essence of their creation is in domination over nature). If you want to succeed, you need high radio towers to overcome the curvature of the Earth. But high radio towers are rare, so they are expensive. Moreover, if there is at least one tree or one leaf between two points / antennas, the connection will be broken. The path must be clear of obstacles.



To summarize For microwave radiation need antennas. For antennas you need towers. The towers should be located as close as possible on a straight line between two points / exchanges. Different competitors need to find a suitable tower located at the shortest distance between two points. The bottom line is that sometimes you cannot install an antenna, because someone else has already installed it (some antennas do not have many antennas, in addition, the towers are often already occupied by other companies - mobile operators, central radio stations, etc. .). Therefore, you need to be quick-witted if you are going to install an HFT communication line - perhaps the competitors have already occupied the tower that you need. High frequency trading is hard work.

See also: Furious bulls: how Wall Street became dependent on “high-speed” trades (series of materials)

Map

In early July, after Bloomberg published an article about Jump and their tower in Houtem, I realized that I live very close (4 kilometers) from the straight line between two large European points - London and Frankfurt (I am an honest man and house marked on the map). At a recent presentation in Chicago, one of McKay Brothers CEO Stefan Tych presented a map of radio relay communication lines that some HFT traders in the UK own or use:



Radio relay links in the UK. Photo McKay Brothers (click to open in full size)

There is nothing visible, and no names. So I tried to label all the towers and signed some names. It was easy to find the towers; drawing paths is hard, as most HFT traders try a variety of options: Jump had a line of communication between Belgium / France and England even before they took a position on a tower in Houteme, but now they can directly reach Ramsgit and Basildon . My map shows not only some of the existing paths, but also various attempts to win space:



Later, I will talk about how I made a map (and about my insane visit to the Jump tower in Houteme), but, in short: 99% of what I found is in the public domain. Just ask Big Brother, better known as Google (click on the buttons, and find links to all publicly available files). In addition, I talked with people working in production, and they honestly helped me understand and understand this very, very, very closed world. They allowed me to achieve a result. This map is only a web of opportunities where the Holy Grail is the shortest path, and some companies jump from one tower to another. In this world, all companies know who their competitors are. It's not a secret. I just found places in which some companies are located, or could be located, or will be located.











It is impossible to describe the whole world with the help of photographs alone. So I did what all the players in the HFT market do: create a file in Google Earth, a map with all the towers that I could find. The map is here . Open it, try zooming. Signatures will be in Part V - Part I - only the introduction.



To be continued…

PS If you notice a typo, mistake or inaccuracy of the translation - write a personal message and we will fix everything promptly.