How to slow down a stock exchange
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- Äas pĆidĂĄn 5. 09. 2024
- High-frequency traders have a few tactics on stock exchanges: but simply put, they gather price information faster than anyone else, sometimes even faster than the markets themselves, and use that to make a tiny profit many, many, many times. There are all sorts of solutions: but it turns out there's a simpler one that involves physics.
Thanks to Ronan and all the team at IEX - you can find out more about them here: iextrading.com/ or on Twitter at / iex
I fact-checked Ronan's claim about the SEC white paper because it seemed a bit too good to be true, but he's right: see Hu, E. (2018). Intentional Access Delays, Market Quality, and Price Discovery: Evidence from IEX Becoming an Exchange. SSRN Electronic Journal. www.sec.gov/fi... [PDF]
Edited by Michelle Martin / @onthecrux
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Apologies for the patchy video quality in places here: my camera really did not like the lighting inside IEX's offices. And to be clear, this isn't sponsored, I just found out about the cable loops and emailed IEX to ask if I could film with them!
**ONE MONTH AGO**
Really interesting and cool video Tom, keep it up!
No fair, why does Tom get to see his videos before we do!
Interesting to see they are using physical spools, just to make sure they do not run in to issues if they need to electronically delay it.
By the way, radio telescopes used to do beam forming like this as well. Just rolls of cable with the exact right length to add up signals!
didn't notice any patchy quality, looked well done as always! Thanks for always teaching me something Mr. Scott
Finally someone found a use for lag.
Maxx B Lag the players whoâs internet are too good XD. This is basically that but in terms of the stock exchange.
Well... Technically GPS works by calculating how laggy each satellite is to you.
(also I'd assume when you say "lag" you mean "latency")
Actually latency is used quite often in scientific research xD
Would be better to just trade on a clock, so all transactions only happen once a second.
Just imagine having the balls to be the guy in the meeting who goes "we could just have a 61km cable in the server room".
@@GeorgeWashingtonLaserMusket
Is there a shorter cable?
Nope, just the 61km one.
F it, I wanna go home.
fr
It's take balls alright
Balls the size of watermelons
Fr
'Sir, I have an idea. We just need to keep a cable in the server room.' see, simple.
I love this. It's totally nuts that in the 21st century the literal speed of light is the only obstacle to financial transactions.
Somebody's gonna figure out quantum entanglement communication; each unit is gonna cost $10 billion, and every stock exchange is gonna say "I'll take 12."
Really just the prime example of how detached the financial sector has become from the actual economy. That humans are almost entirely irrelevant and stocks are traded based on competing algorithms trying to find price fluctuations faster? Anyone who unironically says that stock prices are tied to real-world value anymore _should_ be laughed out of the room.
@@tegopro86 Unfortunately quantum entanglement communication is just sci-fi tech dreamt up by game developers and movie producers that don't understand quantum physics.
@@philip1279 and writers
@@tegopro86 From what I've learned, quantum entanglement is fundamentally a random process so data can't be encoded into particles with it
Imagine the day that RFQ came in to the fiber provider. "You want what? 38 miles? Ok, where are we running from and where is it going? Its all in the same 4U rack mount?!"
Though the provider would most likely be, "Damn, you guys are insane! But here's the quotation."
"Well, at least that makes installation easy."
Followed by what can only be described as cackling laughter as the truth of what's being done slowly sinks in. Because let's be honest, these are probably some of the same providers who helped install the high frequency stuff IEX is attempting to counteract with this solution. They know.
Brian Cox, talk to me about physics in a soft and soothing voice.
Not too crazy of an idea. I work in optical Telecom, and we have many 80km test spools on the lab to pass traffic over and test with propagation delays. Getting the specific length is what had to be custom. But long haul test boxes are fairly common, just not used in this situation before.
Interestingly, I used to work at a radio observatory that did much the same thing. With an interferometry array (lots of radio telescopes in a line, often on tracks), for things to work, it's critically important that signals from all dishes reach the control room at the same time. Yet, some are physically further than others. So the solution is to just pass the signal through coils of cable in exactly the same way so the signals from closer telescopes are delayed more than those from further ones.
This is also true in LCD panels. To make sure that all the dots on your tv refresh at the proper time instead of one side lagging after the other, they just put zig zag traces in the shorter path of the ribbon cable to make it longer and thus the signal will get there at the same time :)
That makes a lot of sense ! I've always wondered how that was done on interferometry arrays. I live not too far from the Bure one,and I'd love to visit it someday, if it's ever possible.
I know that for the EHT the data from the various observatories was physically flown to a control room on what were essentially big data banks, and then recombined several weeks after the observations, but I've always wondered how that happened on smaller scales. Thank you for providing me with that answer !
â@@TheTwister3000 Why would this matter for a LCD screen? The electrical signals are going to be traveling at a large fraction of the speed of light. Across any realistically sized screen this is going to amount to an absolutely miniscule time delay, on the order of tens (maybe hundreds in particularly large screens) of nanoseconds. No human could notice that.
@@epicspacetroll1399 don't quite know actually but from my understanding they do
@@epicspacetroll1399 its not to do with pixel refresh its to do with internal interface busses and things like clock propgation, impedance matching etc.. lots of interfaces have parallel busses, where you need all signals to arrive at the other chip at the exact same time (all sorts of things relating to transmission line theory come into play when you are talking about fast digital signals). They make sure each signal line is length matched (ie you have to add lots of squiggles into the trace to make it match the longest trace in the bus) so ensure everything from impedance to EMC (electromagnetic compatability regulations) etc. Which is fundamental in order to maintain signal integrity such that the receiving chip can actually read the data sent to it.
Its only high speed parallel interfaces (or differential signals) where this matters so memory chips are the big one for that (eeprom, sram, dram etc).
0:42 Those Pigeons are a perfect analogy for what happens when a good deal shows up in high frequency trading. :D
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Alternatively, they could forward every trade through the British government - that should delay the process for oh... two years or so...
Brexit means Brexit
@@jesusgonzalez6715, it's incredibly apt that your comment was posted 8 months after Richards comment (give or take, my UI states 1 year for Richard vs 2 months for yours), hahahaha
Loccyster well at least i saw this on time
Four years*
They could forward it through the Australian Government, it'll be seen to when the Prime Minister gets back from holiday.
I love that the NYSE is advertising their freaking Pinterest.
Someone else said it was because Pinterest were launching their IPO on the NYSE at the time.
How else do you expect the NYSE to DIY their own wedding for less than $10k?
$$$
Those banners hang every big IPO. There are companies you will never hear of again with a giant banner.
@@user-vn3si7vs5u have heard of Pinterest again
I'll bet the industry's argument on the IEX speedbump was nothing more than companies hating the loss of advantage.
No bet, that's obvious.
Even though there are multiple exchanges, they are all owned by NYSE and NASDAQ. They didn't want another player in town.
Entrenched powers making disingenuous arguments to retain unfair advantages? Nah thatâs preposterous... ;)
Bingo.
The 1% want more and more money. Slowing it down and making it human-accessible makes it far more reasonable for the middle class to actually trade, which means the 1% *don't* make literally all of the money possible.
Of course, anyone trading there is guaranteed a loser. I wonder how they've managed to sell this hustle...
2019: Slowing down a stock exchange with 38 miles of cable.
2020: Slowing down a stock exchange with a bat
No. The economy is crashing.. millions of people are filing for unemployment 2020 nyse isnt slower now
Actually, the high frequency traders that they're talking about in this video are the biggest winners with corona. It doesn't matter whether the stock exchange is going up or down, the more it moves, the more uncertainty there is, the more money high frequency traders make. A day in the current crisis makes them as much money as a month does normally.
@@Leyrann that really makes no sense, the market still has to go up for a profit, regardless of how big the change is.
A pangolin**
Good joke, good execution, bad concept. 7/10
"Slowing down a stock exchange with 38 miles of cable"
What a title.
I usually just use a couple planes
Ainât no planes comin cuz ainât no space cuz ainât not globe earth
@@jphanson your reasoned arguments have utterly convinced me
@@jphanson Ah, yes. Space doesn't exist, probably because we can see blue in the sky. Right? Well, tell me how nighttime works, and stars, so on, etc. Although they're all just projections by the government, all over the world, perfectly synchronised, even in places that don't have the tech to do so.
And if it was a joke, well. You fooled me :)
38 miles of detcord would slow down not only one stock exchangeđ
The original reason they used "only physics" rather than software wasn't to make the system more reliable. It was because the software was owned by the Royal Bank of Canada. "Flash Boys", a book about the start of IEX, gives the story.
I have no idea what's going on at any point in this video.
Not to sound like some smart ass but I'd like to explain if you allow it? :-)
@Armando Silvier It can't, it's the idea by it all. Before that super long wire was added, did your income depend on how near you were to the main central. To avoid that and make it fair for all, did they add a "delay" that made the time it took for anyone's computer to the main central. That leveled the "playground" and made everybody equal.
The time could just not be done by putting a real delay in because there could go so much wrong, what if the delay failed, was slower than it should or a million other things. So instead did they just wind up some extra wire and that means the signal has to "run" through the same amount of wire, no matter where you are. :-)
@@friedmule5403 But you still have to send your signal to that delay wire, that introduces a delay on its own, doesn't it? I mean, if you are 10ms further away than somebody else, you will still be 10ms behind? I still don't understand why this makes sense :D
@@Rebius The idea, as far I know, is to connect people on the wire, so that everybody have the same distance. Or in short, the total distance minus your real distance is where you get connected. :-)
There are different exchanges. Each exchange can have different prices for their stocks. This exchange causes a delay in buying and selling stocks on their exchange. In a lot of exchanges, there are colocations that allow wealthy companies to put their servers so it's closer to the action. Also, some companies will have extremely fast wireless hardware and special applications specific integrated circuits(ASICs) with special programming...all for making money faster.
Let's do a practical example:
My HFT bot (called bot A) buys 100 shares at $10.000 per share. My competitors bot (called bot B) is slower than mine, and because I bought a decent amount of this stock, the value went up to $10.001 per share. They were trying to buy for $10.000 per share, but we were faster. Let's assume bot A is way faster than bot B, and we turn around and sell our stock for $10.001 at the same time Bot B is buying. Guess who may be buying that stock? Bot B may buy it from us.
Love this video - I work with latency sensitive software that operates over long distances, and I regularly have to try and explain to people that no matter what we do we're constrained by the speed of light at the very least.
"But can we like, pay more to have it go faster?"
Not with that attitude!
Drill a hole trough the Earth to get the shortest route.
â@@pauli2951 I'm no RF engineer, but I wonder if some classes of waves could travel through the Earth without being absorbed. The rich presence of silicon appears challenging.
@@HyperMario64 Ok, hear me out. What if we drilled a hole trough the earth, but it was a really big hole.
now can someone do this for Smash Bros so i stop getting my ass beat?
GREAT VIDEO, 10/10, i would tell you in person since you're in NY but i'm shy đđđ
Why has Tom not been on Schmoyoho and how can we make that happen ASAP?
OH MY GOODNESS, OH MY DAYUM, OH MY GOODNESS....THEY GOING HAM
Nice idea with Smash Bros and all but do you think it's important enough to not just use a computer instead?
is there an accent on the yo though?
I don't think he's in NY anymore đ
Not sure the NYSE and Pinterest share the same demographic tbh
They are doing this because Pinterest will launch its IPO, they did the same when Snapchat became public.
Hahahaha I doubt it
Maureen is looking for home decorating ideas
meh, idk no one i know thats young uses pinterest, its only old people
@@squidwardo7074 it's mostly young white girls
"There's a lot to be said for a solution that just uses physics" yep. Sometimes the simplest (relative) solution is the best. đŹđ
Cracking video as always Tom! Good to see you again, Happy New Year! Hope you enjoyed the time off!
This guy uses like bots.
Science 1 Big Business 0
Maiahi I posted that comment 2 hours ago?
Hi Tom!
Mechanical solutions are ideal when software has such a bad reputation for being corrupted or hacked. Things in the vein of a physical camera cover will always be more dependable than a digital switch
"why couldn't they just use copper wire" I thought to myself, forgetting what an inductive circuit is.
Can you explain pls
too stupid and never paid attention in physics class.
Eric Meyer any nearby metal or magnets would introduce noise
Effing magnets, how do they work?!
@@c4715 the same way I think stock exchanges work: miracles
induction won't be your only problem, you don't just run a copper cable for miles. Too much resistance, not enough voltage, too much heat, skin effect on cables that are thin enough to fit inside a box and ultimately yes, you won't get any high speed signal through that coil at all.
It's refreshing to hear someone involved in the financial sector speak about fair prices!
If I remember correctly, NYSE implemented a coiling project at their data center in Mahwah, NJ so that all companies who have leased space from the exchange have the same latency from the exchange to their server cabinet.
This reminds me of my university research more than 40 years ago when I used lengths of coaxial cable to send electrical signals on a detour to create the kind of signal I wanted. Luckily I was working on nano and pico second scales, so my cables were a bit more modest in length
Who would win?
Some of the richest and most powerful companies in the world spending Billions on speeding things up
Some Coily Bois
Picolas Cage woooosh
@@stanleyiii_ r/im14andthisiswoosh
@@12MRtrollface Nice. Is this real too?
@@12MRtrollface you're dim
I (as a software developer) would be having head aches over setting up a proper que of the orders coming in to buy or sell, keeping the list up to date with the other stock exchanges and accounting for the delay for the prices the other stock exchanges have, and managing all of the concurrent connections that I need to keep open until I can confirm or reject the order.
Then a hardware person comes through with 3 big spooles of cable and instantly has the solution ready...
over00lord Unknown it's stack less.
This was really interesting! Sometimes, it feels like everything digital has been abstracted away into software. It was nice to be reminded of how important hardware can still be!
I love this - I will show this to some of my students - I work in simulation and I'm often told that the connection between two or more simulations needs to have *ZERO* latency. I explain about the laws of physics but it just bounces off their pre-conceived ideas.
2:04 frame skip... his secret got edited out. Illuminati confirmed...
Michael Lewis wrote this great book, Flashboys, which delves into HFT and IEX if you want more info.
Undoubtedly what this video is ripping off - without giving any credit
@@thomasharris1090 Same topic = ripping off?
@@thomasharris1090 how is talking about something someone else already talked about ripping them off?
@@thomasharris1090 Read the book you won't feel ripped off
You should read the response book, "flash boys not so fast" Explains how the original book is a misleading sensationalist piece of trash
During my PhD research in nuclear structure physics we used the same methodology in the data acquisition system. We're talking analogue electronics; detectors measuring the current of the beam, plus a whole bunch of other stuff, and pairing that with readings from HPGe gamma-arrays. A particle flies at the target, and hits, giving off gamma rays. We don't want to record data about the particle if it missed or went straight through the target, so we set up a gate, a literal time window after a gamma ray measurement when the data about the particle is accepted. ...but these signals take different lengths of time to get through their respective (analogue) processors, so we just add more cable. Rule of thumb: One nanosecond is about 30cm. We did it that way for convenience, but there are analogue electronics modules that will do the same job that these guys are aiming for (and probably for a lower price).
I have a question about physics: can you send information back in time? Like if team A or team B will win.
@@mamupelu565 No.
@@mamupelu565 depends what you mean by back in time, if you have someone watching a match on tv betting, and they have a high speed link with someone else watching the match in the stadium, they see what is happening on tv after knowing it has happened, and they can win a bet like this. Information traveled faster through one channel than the other, giving the impression of travelling back in time.
@@mamupelu565 Read about backwards causation on quantum mechanics.
@@mamupelu565 absolutely, yes
"and you know what happens when everyone's super? Noone is"
In a world of increasingly inventive chancers the thought of some good ol' non-negotiable physics in a process is a very reassuring one. More of this kind of thing!
So glad you decided to cover this topic. IEX is doing something revolutionary to traditional finance and is just paving the way for the future.
The BBC used this principle at TV Centre (White City, London) with drums of video cable to introduce delay to synchronise cameras and video tape players that were in different parts of the building, so the combined output would be stable.
"I [suspect] that we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this 'paper economy', not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges." --James Tobin, July 1984
I hate how people "generate wealth" for themselves by gaming a system rather than actually accomplishing something that makes the world a better place. Thank you for that brilliant quote!
oof
While it's true there are far too many millionaires solely based on shuffling papers around, the market wouldn't have much value if there weren't actually people producing things. Apple stock is worth a lot because Apple produces products a lot of people buy. Juicero stock on the other hand isn't dong too well these days...
@John Fulghieri Which is why the quote says " financial activities remote from the production of goods and services"
John Fulghieri of course, and if we had constructed a system requiring everyone to fill out a 27b-6 before taking a step, breathing, or some other action, then filling out peopleâs 27b-6 for them would also be considered a âvaluable serviceâ. It would still be a waste of everyoneâs time, nevertheless.
This made me so happy to see! As someone who has read "Flash Boys" by Michael Lewis, it was so cool to see IEX live. Really great book, read it! You'll be stunned over how exciting the stock market can be, and intricate
I don't get stock exchange and I don't know if I ever will. Economics is confusing...
A stock exchange is just a way to artificially create money.
Just people that can buy things and sell them. Thatâs the basis.
@@AlanKlughammer .....I mean, there has to be a place where people can buy and sell shares, just like there are places for buying and selling houses and land.
@@maxlife459 so what exactly is a share? 0.01% of a company? How does reselling a share of a company help the original company? buying and selling land, at least you have the land...
Alan Klughammer
Itâs called investing. People invest in all sorts of stuff.
The way that money is created is the Federal reserve...which is not federal or a reserve. They literally create money from nothing.
Catching up on old Tom Scott videos after recently following him. Years ago I read Flash Boys by Michael Lewis which covers the story behind high frequency traders and IEX. Nice to finally get to see the spindles of fibre.
I think there should be a restriction on the trading speed for any stock exchange. They fight for microseconds of latency advantage and waste lots of money doing that.
Nope. It's not a waste of money. It's basically the "price of admission" for a certain class of traders that spot and take advantage of "errors" in the market.
@@GilmerJohn or put more plainly, it's a way for large trading firms with enough money to invest in such systems to insert themselves as a covert (and unwanted) middleman in every transaction invoving a party with a slower connection, sucking money from all small players in the "game" to concentrate power and wealth in their hands.
Btw, a (very) small transaction tax on each trade would end this almost immediately, reduce market volatility, and provide a lot of money for social programs or lowering taxes on actual people.
@@dynamicworlds1 The flaw isn't some traders having faster access, it's some traders having privileged access, like being able to break the atomicity of the order book. Like being able to react to orders before they hit the order book. That's what creates "middleman" semantics, not the mere fact of being a microsecond closer to the order book.
@@bpj1805 It's not just about privileged access. We're also talking about people using supercomputers running cutting edge software to do microsecond trading to aquire wealth in between trading done by actual humans.
@@dynamicworlds1 "a (very) small transaction tax on each trade would end this almost immediately [...] and provide a lot of money for social programs or lowering taxes on actual people."
If the practice ended how would you get tax dollars from it?
I find this to be a simple and extremely clever solution to the problem they had. Great job guys.
and non circumventable.
"Ye canna beat the laws of physics, Captain"
Elon Musk: Lemme launch 42.000 satellites into space and I wish you best of luck with that fiber optic delay line.
Remember when the stock market was a way for ideas to find capital and vice versa? Pepperidge farm remembers.
What? no!
greedy people ruined it, and ruined it so fast that they were able to make enough money to pay congressmen/parliament not to pass laws to stop them before congress/parliament even realized what was happening
like many things in the information age
The stock market has always been a casino. Derivatives are the best
I've watched this a few times and I still don't really understand how the extra delay benefits anyone? If everyone has to go through the same slow path to get the data, aren't you still fighting for time gains on the other side of the "speed bump"? E.g. The fibre coils add, 500ms to every connection. But that just means everyone is fighting to get as close to 500ms as they possibly can?
It actually matters a lot. It's fundamentally about giving the exchange time to let signals propagate before people react. The exchanges don't have delays when communicating to each other, so you can never exploit the propagation delay of information from an exchange to IEX, because by the time your information gets through the fibre optic cable, IEX has already been updated on the new prices.
More broadly, it means high speed traders are always working with slightly outdated information, and their own messages to the exchange are delayed, giving time for the markets prices to equilibrate and move about while the messages are still in transit. This wrecks the ultra-high-speed trading model, which relies on being able to exploit micro-movements in the market before anyone else even knows they're happening, or about to happen. Adding a little lag means a high-speed trader is sending messages blind about where the market will be in a few milliseconds, and based on information that is a few milliseconds old.
Michael Lewis's book Flash Boys is about high-frequency trading and Ronan's exchange with the coiled fiberoptic cable in a box
I already knew about this thanks to the book _Flash Boys_ by Michael Lewis, and his book makes clear just how much of a boon this one exchange is, and how difficult it was to get banks to trade on a fair market.
not sure if it's on purpose, but the pigeons fighting over a small scrap of bread in the background is really fitting!
00:42
Very interesting. I remember watching a Defcon talk on how people were competing in speed of access to stock exchange, it was an interesting talk on what other elements introduce just enough delay for it to matter (all of which were also potential security holes).
This is an amazing example of thinking outside the box. Didn't know this was a thing. Awesome video Tom!
@@firatkozan6881 touche' xD
Electronic delay lines have been around for decades. I never thought about making an optical one, though...
Oh boy oh boy. Just read flash boys last year and am currently reading dark pools. I can really recommend these books if you're interested in high frequency trading and it's problems.
I cannot see this being more secure than any digital buffer in practice. Either method would live or die on the measured results. It's a gimmick to get coverage, and likely in reality they actually *do* just use a logical buffer, which I imagine would be far more reliable and auditable. Job done.
as someone who actually has had to delay signals, using fiber optics is a fairly standard way to do it. Logic buffers sound good on paper, and have their uses, but if you're trying to delay a signal by a short and constant amount of time, fiber optics are a good, reliable and not overly expensive solution
â@@platypusoj7321 Can you explain what applications they are better for than a buffering switch and why? What was your job? On each end of that fibre there are already switches, right? The only situation I can imagine is a 'remote, non serviceable' area where it might make sense. But in the middle of a data-center?
Excellent stuff and well done iex. Maybe all stock markets should be required to do this.
Im confused. Wouldnt businesses further away still be affected to the same degree? If everyone is offset by the same amount due to the additional cable lenght, its that offset + distance. You could still subtract distance from that equation and be faster.
Ok, that's genius. Timers? No. 38 Miles of Fiber Optics? Yes.
Great video Tom, and glad to see that you have returned.
Billionaire: *invests millions into sophisticated equipment to make him money*
Guy with a long wire: I am about to end this mans whole career
I worked for a large stock exchange and they didn't use cables. Instead they update their prices every 100 ms (!). As of today, they are growing fast and gain market share real quick with the result, that they are the biggest stock exchange for private clients in my country.
I've been reading Michael Lewis's "Flash Boys" and it was amazing to realize that this was where the story was headed!
GAMESTONKS
I don't think it would be cheaper to use a computer to introduce delay. 27k USD won't really buy that much when it comes to server grade hardware. Not to mention that that fiber would be much more reliable. Factor in that it's passive equipment that doesn't need to be powered.
27k for a bit of fibre cable tho? ;-)
@@honigwachsreuben The fiber delay looks good on camera. It's a heck of a lot less expensive to introduce a digital delay.
I like the visually verifiable nature of the fiber delay. I wonder if they have each sealed, certified and auditable?
@@honigwachsreuben 40 miles of it?
Right, cause now theyâre avoiding computer althogether innit?! Brilliant!
In my Youth as a radar engineer in the RAF several radar systems used reels of cable as electrical delay lines, banks of capacitors and inductors were also used to make the system more compact.
Mr. Tom, your channel is always a source of amazement. You can take topics that I didn't have any idea i wanted to know about, and you give an amazing delivery, keeping me enthused the whole time. Congrats.
Also, and this is maybe a question from many of your viewers, why/how do you look 24 and 54 at the same time? it's all part of the fascination.
I love your channel.
I remember reading about this exchange when it was new, haven't heard a thing since then and glad it's doing well.
I remember an episode of the tv series "Elementary", where someone intercepted the data in a cable to the exchange and delayed it by less than 1 second, time enough for their computers to make trades before changes occurred due to updated information.
Twas a good episode. Love that series. They tried really hard to find realistic plot scenarios.
Nice job in court today IEX đđŒ
That's great... a solution that is just simply 'a lot of extra wire'. I want to be in the meeting where that was created.
It's actually kind of a common solution for high speed problems. Graphics cards for example specifically extend certain integrated lines so that they are all the same length and all data arrives at the same time, in the correct order, from each one.
I read a book about the founding of this exchange some years back. Iâm excited to actually see those big spools of cable!
I work at a Corning plant that makes the spools of raw optical fiber they have in that box.. caught me way off guard scrolling down CZcams to see it was Tom Scott haha
What they do tell you, is basically that this cable gives the exchange itself an advantage when comes to communicating with other exchanges. What they don't tell you, is that HFT is still works absolutely the same between traders themselves. They have same delay introduced by the cable on top of all regular delays. And the regular delays are still subject of being reduced to minimum to gain an advantage. There's a major hidden BS in the marketing they're doing.
More relevant than ever with tomorrowâs judgement
The truth is that ordinary people can't sell or buy stocks as fast as organized professional stockbrokers.
Stockbrokers have the upper hand and make money not only when their ordinary customers are winning but when they are losing too.
Iâve worked on ULLDMA systems for years so was very happy to see one of my favourite youtubers come out with this video!
There are 2 things that could stop high speed trading. Taxation and pausing. A small tax over the the value of the transaction would remove the micro profits from instant transactions making them obsolete. Pausing, turning transactions into a bidding game with the highest bidder winning after x minutes or hours or whatever.
Cool video, but I don't think I understand the point.
They want a 350ms delay so humans can trade fairly with them too.
But doesn't that give them a disadvantage compared to others that don't have that delay.
There was also something about trades going before the price was even decided, but I don't see how a delay in information gathering will give them a fairer price.
Because everyone has the same cable, with the same material, the same length, and they're definitely not allowed to use a different one to unfairly get an advantage. Listen you dumdum
I think they are not delaying their info to themselves, but rather to its users that use automated systems. And I guess to humans they don't route them through that cable so they get some seconds to decide? I'm not sure since there weren't many details or not be clear at least. In any case, why would you want to be a user of that exchange that slows you down, if you can go to one that doesn't? If it is legal, you want the most advantage you can get
But then if they're the only stock exchange *purposefully* introducing a delay, why don't all these traders just go use a faster market where they can make deals quicker??
@@peanutismint Well, that's probably why you've never heard of the IEX stock exchange before. They're not very large. IEX, along with Miami International Securities Exchange are the newest exchanges in the US were only founded in 2012.
Here's the issue people are not getting. The problem IEX is solving is that the front running was because High Frequency Traders (HFT) had really fast connections to the market but ALSO to fast connections to other slower exchanges and could see other people making orders on the slower connection. The HFT would run ahead (front running) of the order, before it comes into the exchange, would quickly buy out the stock for the price the order was looking for, and then offer it for a little bit more. The slower exchanges would see their buy order just fail to never 100% complete and then have to eat the small price increase to fill it all the way.
Now to tell what IEX is doing exactly, there is a thing called the Securities Information Processor (SIP) which is a shared feed that everyone which has best bid and offer quotations and all trades from each registered exchange and FINRA. This SIP lists each security and the exchange that is selling it for the cheapest or buying it for the highest. This is called the National Best Bid and Offer (NBBO). Exchanges NEED to update this feed when they buy/sell so everyone that buy/sells will go to that exchange.
IEX is responsible for updating this NBBO, but this transaction is NOT associated with trading of any kind. HFTs will see this update and buy/sell before the order even comes through that exchange but not before the NBBO is updated by exchange.
How IEX helps the customers is to keep the NBBO update and the actual order super close to each other so HFT won't be able to react to it. The order is passed to IEX and the company then goes through the process of updating the NBBO. This takes about 250ms of time. The *actual* order that would have gone to the market is spun out into the reels of fiber which changes the order fulfill time from
High frequency traders leech money from the market without creating or providing any value.
Yep, plus it creates opportunity for flash crashes.
They basically steal the wealth generated by people and companies that actually do work and provide services.
@@iz723 They are actually just stealing from each other, It's more like gambling. If Rick Szalay Inc. issues and sells a share for $5 and you buy it, then I have $5 from you and you a have a share worth $5. If you then sell your share for $6 then you have $6 dollars but I still have my $5. The "Market" still has the same amount of money but the sap you sold too is out a little cash.
This is just objectively false. The entire stock market is built upon connecting buyers and sellers, this adds tremendous value to both those parties, and both are willing to give up some value for this service. Because time is money, the faster you can pair up these two parties, the more value you add to both, and so you *deserve* the small profit you made. Your slower competitors are now out potential profit, *because you provided a better service than them.* High frequency traders benefit everyone except smaller traders, who are less efficient anyway. That's the way it should be my friend.
@@ObjectsInMotion There's value in connecting buyers and sellers, but only to the degree that you allow them to make informed decisions on what to buy and sell. Buying a stock is an investment. If the purpose is to just sell it 0.02 seconds later, then the very purpose of stocks has been defeated.
I can see how this delay prevents traders from outspeeding the exchange itself, but how does it prevent them from outspeeding other traders? If I was designing an exchange and wanted to level the playing field between human and computer traders, I would have the system buffer trade requests for maybe 1 or 2 minutes and then process all of those trades before updating the prices, using a lottery to assign shares when there is a mismatch between supply and demand within that buffer period.
That wasn't their goal. Why would you want to make all traders equally stupid?
I remember the movie Idiocracy where when president Not Sure stopped using Braundo to irrigate the crops, it crashed the markets. Automating high frequency trading seemed like a sure fire way to guaranty this will happen in reality during a bear market.
Ooh these are the Flash Boys people. Fascinating stuff, they offer another likely fairer solution in the marketplace
i don't understand how this should work. the computer trading from a short distance like 38+2 miles is still way faster than a person on the other side of the planet
No. The IEX gets to see the market pricing data without the delay BUT all their customers [the people who use the IEX exchange] are equally slightly delayed by the 'speed bump'. Look up the Wiki for the IEX.
It's not about the buyers being faster than each other, that's still the same situation, it's about the buyers being faster than the exchange. Imagine the classic scam where somebody is watching a sports game live and then sends the information to someone in a group watching on delay (unknown to the others in the group, say a bar whose cable feed's been lagged by 30 seconds). That second person then proceeds to make bets based on things they know will happen. IEX has multiple exchange sites people could connect to, so if they didn't have a delay then when information reached one someone stationed there could act on it before people at the other exchanges even knew it happened. Put in a delay at the site that gets it sooner, measure everything very carefully so it all syncs up, and the copies of the exchange now display changes in the market simultaneously.
I agree that it would have been nice to calibrate it so that anyone within X km had the same delay, but apparently that wasn't their goal here.
@@adamsbja Excellent explanation! I was somewhat confused until I read your comment but it all makes sense now - the idea is for the exchange to get the data as quickly as possible but for all the traders to have an equal very small delay to prevent gaming of the system. Tom might want to pin your comment.
adamsbja which is in fact the whole premise of the scam in the 1973 film The Sting: they get the race results before the bookmaker
Damn. I really though Tom would take 38 miles of cable to a stock exchange and troll everyone by somehow slowing it down with the cable. :D
The best solution would simply be a law that simply says that no person or business can make more than 3 round trip trades on any particular security in a 24 hour period and a maximum of 6 round trip trades in total during any given 24 hours. The markets a intended to be a place where INVESTORS go to INVEST in businesses. It's turned into a gambling playground for amateurs and a cash cow for corporate traders to milk.
Or just put a small transaction tax on every trade
Well, there would just be more "individuals" trading, still performed by one computer.
The better option would be one trade every 10 seconds. Still sounds like a lot, but we are talking about microseconds here.
A simpler solution is to tax stock translations 1/10 of 1 percent instead of personal and corporate income tax. This is like .25 cents on $250 in groceries, or $500,000 on a half a billion in stock.
Let wealthy investors from all over the world pay US taxes instead of just Americans.
Or we could let the market be free and not let the governement disturb us everywhere
@@dynamicworlds1 taxation is theft
This is excellent! Anyone who has learned trading, not just investing, in the past decade knows how rigged the other exchanges really are. There's a reason people quit and just bought ETFs.
I still don't think I understand this. They're slowing down some sort of data to give people some kind of advantage? What exactly is it doing, & who are it's customers?
Companies spend lots to put an ultra-fast computer right across the street from the stock exchange, then take advantage of price fluctuations over microseconds to trade in and out of stacks before the majority of other users can even detect that the change has occurred. Adding this delay allows all users to have access to the data in a similar time frame, and takes away this unfair advantage of select companies having information before others do.
As evilgibson explains below, Here's the issue people are not getting. The problem IEX is solving is that the front running was because High Frequency Traders (HFT) had really fast connections to the market but ALSO to fast connections to other slower exchanges and could see other people making orders on the slower connection. The HFT would run ahead (front running) of the order, before it comes into the exchange, would quickly buy out the stock for the price the order was looking for, and then offer it for a little bit more. The slower exchanges would see their buy order just fail to never 100% complete and then have to eat the small price increase to fill it all the way. Now to tell what IEX is doing exactly, there is a thing called the Securities Information Processor (SIP) which is a shared feed that everyone which has best bid and offer quotations and all trades from each registered exchange and FINRA. This SIP lists each security and the exchange that is selling it for the cheapest or buying it for the highest. This is called the National Best Bid and Offer (NBBO). Exchanges NEED to update this feed when they buy/sell so everyone that buy/sells will go to that exchange. IEX is responsible for updating this NBBO, but this transaction is NOT associated with trading of any kind. HFTs will see this update and buy/sell before the order even comes through that exchange but not before the NBBO is updated by exchange. How IEX helps the customers is to keep the NBBO update and the actual order super close to each other so HFT won't be able to react to it. The order is passed to IEX and the company then goes through the process of updating the NBBO. This takes about 250ms of time. The actual order that would have gone to the market is spun out into the reels of fiber which changes the order fulfill time from
But, if they introduce the speed bump, doesn't this make them slower than the other exchanges?
They ARE the exchange ;)
Well yes, but it doesn't really matter, they're not competing with the other exchanges, traders are competing on their exchange.
@@TsunboRecords yes but there is also other exchanges people could do to. I'm confused by this as well why would any high speed traders use this? They lose their advantage.
@@TotalElipse That's what I thought. But, I can't understand how would it be beneficial, if the assets/Goods that are traded in this exchange are on other exchanges too.
@@TsunboRecords but, don't they lose edge versus other exchanges?
But if you're just introducing lag for everyone. High frequency trading is still going to be faster then a human.
I think the key is the exchange analyzes the input data for sure before offering prices to the trades
The point isn't to make high frequency slower than humans, its to make it slower than the exchange algorithm which sets the prices so that the prices are the same for humans who view the exchange prices and the high frequency traders
The point isn't to make high frequency slower than humans, its to make it slower than the exchange algorithm which sets the prices so that the prices are the same for humans who view the exchange prices and the high frequency traders
Introduce a 30 minute delay.
@@UncleKennysPlace But that can only achieved by software which can fail or be hacked.
I think I ought to recommend a film for this video: The hummingbird Project. It's a film about this idea of getting stock exchange info faster than anyone else. It's got a 7.1 on IMDb, so it's I guess it's an okay film.
Of course They say it is to help YouđŹđ
Getting that 350ms data slippage is great for arbitrage trading, actually close to a scam
Interesting topic but I don't think this was the most... layman friendly script you could've put to video.
FelixOrion layman here, watched the video twice and still donât fully understand it. Would have enjoyed a quick laymanâs breakdown from Tom at the end of the video or something .
Big companies were using computers to determine changes in the market and trade on the NYSE faster than a human possibly could.
IEX prevents or at least reduces the reaction time benefit from the computers. All incoming trades must go through the 32 miles of fiber optic cable before it reaches IEX's system.
Since the signals cannot travel any faster than about 31% slower than the speed of light (how fast light travels through fiber optic cables) this ensures there is a certain amount of delay, preventing or at least reducing the advantage computers have from instantaneously reacting to changes as they happen. This also helps them to ensure they display more accurate pricing to the public, rather than having computers "beat" the stock exchange and trade before that price is official.
@@jonathanmueller2849 Thanks!
@Richard Clutterbuck You are correct that the coil introduces a general delay and it affects the frequency with which computers can trade. That is actually the main reason why, to eliminate computers trading faster than humans.
The problem was that companies would place their computers right next to the stock exchange, so the short physical distance helped the computers to be able to process changes to stock prices before the actual exchange could publicly update the price.
So the goal is to force there to be some physical, impassable buffer so that no matter how physically close you are to the exchange you still have a significant enough delay.
If it takes 0.1 seconds to receive and send a signal it's much easier for a computer to frequently sell or buy according to the updating market. If it takes a few seconds to receive and send a signal then a computer is not able to flood the exchange with trades before the price updates are published.
Financial companies bought up property around the NY Stock Exchange specifically to reduce that computer delay because it's such a significant advantage. This stock exchange aims to allow people and companies not physically next to the stock exchange to trade more fairly alongside big financial companies.
@@jonathanmueller2849 OK Google u.s. stock exchange
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Investing is most intelligent when it is most businesslike
I totally agree with you it has been an eye-opening experience for a lot of people
They essentially installed a passive optical delay line......brilliant application to be honest!!!
Reminds me of the Central Apparatus Room at BBC Television Centre. Long gone I assume but that used to have miles upon miles of Co-ax in the ceiling to delay video signals so that the timings would be right to studios.
At BBC TV Centre in White City, there used to be big drums of cable in cupboards in the basement specifically to sync analogue pulses so you would have the same blanking period throughout the building (studio runs were similar, but not identical lengths). Physics is so reliable ;-)
I have literally no idea how stock markets work. The jargon, the âproductsâ, âpositionsâ. I like to think I have a decent grasp of history, geopolitics, the sciences etc.
But finance, stock markets etc. Nope. Nada.
I just felt the need to share đ€·đ»ââïž
A lot of that is by design to hide what's actually going on. For a simple example, plenty of stocks don't pay dividends or give voting rights, meaning they meet the definition of a Ponzi-Scheme.
Do you understand how supply and demand works? Then you understand the "market" component. The 'stock" aspect is trickier, but it will make sense if you take financial accounting.
This is why I trade stocks on my Dell tower from 1989
New York stock exchange on pinterest dafaq?
Because Pinterest is about to do its IPO
Remember to specificly select IEX when buying stocks via broker, they realy dont like sending your orders there.
The sound of Wall Street is a dull roar of what sounds like ventilation systems, whirring fans and steam tubes. It's loud down there-normal speaking volume feels like you're whispering. BUT, it's such a treat when you live and work in the rest of lower Manhattan, because your ears aren't constantly hit by alarms and sirens and horns of all the vehicles. Wall Street doesn't allow cars for blocks and blocks away, and consequently that part of the Financial District feels... peaceful.
These guys literally made a real life Minecraft repeater
Question: If the problem is traders gathering price information faster than the markets, why do they slow the signal down even more? Isn't that making the lag worse for the exchane?
The exchange is slowing down the inbound requests to make a trade. By doing so, the exchange is given a small window to have the most up to date prices before processing the requests.
Say a stock is listed at 10$ on IEX. An advantaged trader sees on other exchanges that the real stock price is 11$. The trader puts in a buy order on IEX for 10$, because they know the real price sooner than IEX. However, because of the delay, IEX is able to see that the real stock price is 11$, so the order to buy at 10$ is not completed.
Of course the real margins are much much smaller, but high frequency traders make their profits off many small gains.
By adding a delay, the exchange is in a position to always have more information than the trader did when the trader made the offer.
Or with a couple of redditors
In Germany, we sometimes say IBM stands for "Immer Besser Mechanisch". Which means "always better mechanically"
Thank you for doing a video on this subject, I tell people the story of the stocks in Chicago and New York and people think I'm making it up.
Capitalism: pushing the boundaries of physics for personal profit
Communism: trying and failing to push the boundaries of biology to make plants that share all resources then failing and starving to death.
Boy Genius: A Jimmy Neutron Movie official DeStRoYiNg LeFtIsT WiTh FaCtS AnD lOjIc
That so bad?
@@GoyBenius_0901 That not was communism is, but sure my dude.