High Frequency Trading and the return of the pit
July 25, 2009
Following up here on yet another great post by Martha. High Frequency Traders (HFTs) employ trading strategies that are dependent on very quick conditional buy and sell orders. These orders are aimed, for example, at exposing the typically well-hidden order limits and size of orders of other traders. The speed of order production is based, in turn, having as few mediators in the communication network between the traders’ computer – generating the trading orders – and the exchanges’ computer that executes them. In a world where every millisecond counts, event at light-speed speeds, physical distance counts. In fact, we should say ‘physical distance’ counts AGAIN. Yes, physical distance, which used to be an all-important factor in the face-to-face trading pits, is now making a comeback in the form of vicinity from the exchanges’ servers.
This, of course, brings back the issues about the politics embedded in market spatiality. Kate Zaloom shows how important were the top steps of the trading pit in the Chicago futures exchanges, and, consequently, how the political (and sometimes physical!) struggles for these coveted locations. Can we expect similar fights to rage over positions in the electronic communication network that transmits trading orders? Judging from the evolving competition for ‘electronic proximity’ the answer is positive. For example, Wall Street & Technology reports that in 2007 about a 100 trading firms relocated their serves into Nasdaq’s trading headquarters, just to be close to the executing servers and to shave off about 7-35 milliseconds from the communication time (depending on previous location of trading servers). Similar trend is evident in NYSE and the Chicago futures markets.
What does trend teach about the techno-social nature of markets? From an actor-network perspective, this is yet another evidence that markets, just like any other social institution, do not exist in a baboon society. That is, materiality, in general, and tools and devices, in particular, are delineating and indeed, shaping social interaction. There is at least one more insight to be gleaned here, though. It is true that physical space is reintroduced to markets through the relocation that comes along with HFT, but something much more important is being introduced to market with it: the rich, nuanced information that used to be the lifeblood of face-to-face trading and the infrastructure of liquidity supply is now communicated electronically. Techniques such as ‘pinging’ and ‘fleeting orders’, both based on algorithmic, high frequency trading (among many other techniques) are the electronic equivalents of a specialist muttering a clue, under his breath, to a nearby floor broker. It used to be the commonly held belief that electronic markets offer a distinct dichotomy between placing an order and not placing it; a distinction that could not have existed in face-to-face market were clues, partial disclosure and innuendos were an immanent part of trading. In fact, that claims about electronic markets’ improved transparency were based largely on this techno-social characteristic. However, HFTs seemed to have blurred this distinction and even question whether it actually ever existed. In a paraphrase on Latour, we can ask: have we ever been electronic?