THE LATEST TWIST IN HFT(HIGH FREQUENCY TRADING): ATOMIC CLOCKS
Mr. J.K. shared this story with us, and I have to talk about it. In previous blogs I’ve talked about the growth of “dark pools” and HFT (high frequency trading) algorithms, where computers place trades on the stock markets and commodities markets, and a few pico seconds can mean whether a trade is placed or not, or whether a trade will be successful and profitable or not. Now, the latest twist, according to this article, is that atomic clocks are now to be brought into the picture:
Yes, that’s right, the rates of radioactive decay will be used to coordinate simultaneous trades in multiple markets:
The 16-page document was quietly published by the U.S. Patent and Trademark Office in February. Replete with schematic drawings, the filing describes a novel way for “executing synchronized trades in multiple exchanges.” The invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks — precisely calibrated to vibrations of irradiated cesium atoms — to sync orders to within a few billionths of a second.
And if it works as advertised, one of the most illustrious names in the hedge-fund business could gain exclusive U.S. rights to a weapon capable of thwarting even the most predatory of high-speed traders.
The application belongs to Renaissance Technologies, the ultra-secretive and highly profitable $32 billion firm founded by mathematician and former code breaker Jim Simons. And the lengths it’s been willing to go to build and patent its own computer-driven technology — at a potential cost of tens of millions of dollars — underscores just how big a threat high-frequency traders have become to the industry’s largest and savviest players.
As you might expect, I simply cannot resist some high octane speculation – or in this case, really way-out-there-in-orbit speculations – about this story. In the past, I’ve pointed out that HFT really is a kind of trading that is no longer reflective of genuinely human markets. After all, the 2010 Flash Crash showed us what can happen when a computer “goes rogue” and places trades that can literally drive down or pump up a stock or even whole blocs of stocks with no real reflection of their market value (AI anyone?). And for those wanting “the nightmare” scenario, think of that episode from the CBS television series Person of Interest, where a malevolent AI literally crashes the New York Stock Exchange, then miraculously shuts down its trades just before the NYSE’s “failsafe” systems kick in to suspend trading. And if you really want to speculate wildly, remember all those stories of UFOs shutting down, or worse, turning on, ICBMs in their silos and beginning the launch countdown. ETs, or AIs, take your pickm the bottom line is that HFTs provoke the philosophical debate not only of how secure digital systems are, and how well, or poorly, they reflect genuine market value and trades.
But leave all that aside for a moment, and concentrate on the new technology here: to place simultaneous trades in several markets via atomic-clock “time stamps” is vulnerable on another ground entirely, and that ground is revealed in the implicit assumption it makes about the nature of those radioactive isotope decay rates: that they are stable and constant over time and in all frames of references. And that’s the rub, for they may not be. There is a body of evidence to suggest that they are subject to the torsion effects of rotating systems. A few years ago, in fact, the US Navy conducted an experiment where two syncronized atomic clocks were used, one remainin on earth, and another taken in a high altitude aircraft and flown as quickly as possible. THe result? When the aircraft returned to Earth its atomic clock was reading a few units of time(albeit, very small ones!) slower than the one on the Earth. But those few teensy weensy inuts of time would mean, in the world of high frequency trading, that trades may or may not be executed, or, if executed, be profitable or not.
Let’s throw in another bit of data just for fun: satellites experience “drag” effects due to the rotation of the Earth, a phenomenon first theorized about in the private correspondences of the Austrian physicists Thirring and Lense and the German physicist Walter Gerlach (that name should ring a Bell to a few of my readers). Such drag effects would, if the Navy experiment is true, produce effects over time for trades executed via satellite networks employing such clocks. And access to satellites would be essential if one wanted to “coordinate trades in several markets”. Go a bit further down this road of high octane speculation, and one can envision a technology that could “tinker with” the decay rates deliberately, and you get the idea: the opportunities for fraud and economic warfare abound, in a kind of “econophysics with a vengeance.”
Well, all of that is, to be sure, really wild and high octane speculation. Chances are, if true in any sense, it’s a ways away. Relax. Nothing to see here, no need to worry.
But I can’t help but thinking that perhaps, just perhaps, this may be another reason why certain countries are so anxious to build parallel international clearing systems.
See you on the flip side…