High-Frequency Trading - Christopher Steiner

  • Aired:  11/14/12
  •  | Views: 35,788

The journalist examines the Flash Crash of 2010, nanosecond trading, and the algorithms behind Wall Street. (5:56)

(LAUGHTER) NOW SOME SAY -- (APPLAUSE) SOME SAY ALL THIS -- (CHEERS AND APPLAUSE)

THEY STILL LOVE YOU, LANCE.

NOW, SOME SAY ALL THIS COMPUTER TRADING IS DANGEROUS BUT I SAY IT'S ACTUALLY SAFER BECAUSE IF

THE STOCK MARKET EVER CRASHES AGAIN, INSTEAD OF BROKERS JUMPING OUT OF WINDOWS IN A

PANIC THEY'LL SIMPLY TURN ON THEIR COMPUTER AND SEE THE SOOTHING MESSAGE "ERROR 404,

ECONOMY NOT FOUND." (CHEERS AND APPLAUSE) BECAUSE, REALLY, WHAT'S THE WORST THAT CAN HAPPEN?

HERE TO TELL US THE WORST THAT COULD HAPPEN IS THE AUTHOR OF "AUTOMATE THIS: HOW ALGORITHMS

CAME TO RULE THE WORLD." PLEASE WELCOME CHRISTOPHER STEINER.

THANK YOU SO MUCH!

(CHEERS AND APPLAUSE) NICE TO MEET YOU.

OKAY.

NOW WE HAVE THE BOOK HERE "AUTOMATE THIS: HOW COMPUTERS CAME TO RULE THE WORLD."

HOW DID THEY COME TO RULE THE WORLD?

HOW MUCH TRADING ARE WE TALKING ABOUT?

JUST A LITTLE BIT, RIGHT?

>> SURE, SURE.

AT LEAST HALF EVERYDAY.

SOME DAYS AS MUCH AS 70%.

WHEN THIS STARTED, THOUGH, IT WAS KIND OF A GOOD THING.

IT WAS A DEMOCRATIZING MOVEMENT IN THE STOCK MARKET.

IT USED TO BE IN THE EARLY '90s IF YOU WANTED TO MAKE A TRADE YOU HAD TO CALL UP A BROKER AND

MAYBE YOUR TRADE WOULD GET EXECUTED IN A COUPLE HOURS.

NOW YOU CAN SIT AT YOUR KITCHEN TABLE AND BAM, $7, YOU MAKE A TRADE.

WELL, WE HAVE THAT ABILITY AND THAT MESSAGE --.

>> Stephen: THAT MESSAGE GOES TO A TALKING BABY.

(LAUGHTER)

>> YES.

WE HAD THAT TEN YEARS AGO BUT THINGS HAVE GOTTEN SO OUT OF CONTROL THAT THE THING LIMITING

THESE ALGORITHMS NOW IS THE SPEED OF LIGHT.

IT'S TOO SLOW.

SO THEY'RE NOW USING MICROWAVES-- WHICH IS ALSO THE SPEED OF LIGHT-- TO TRADE BETWEEN CHICAGO AND NEW YORK.

A LOT OF THESE TRADES BOUNCE BACK BETWEEN CHICAGO AND NEW YORK.

BEFORE THEY USED MICROWAVES A BUNCH OF GUYS --.

>> Stephen: MICROWAVES, LIKE HEAT UP YOUR COFFEE MICROWAVE?

>> IT'S A RADIO SIGNAL THAT THEY'RE TALKING ABOUT MOVING MOUNTAINS FOR SO THEY CAN GET A

STRAIGHT LINE BETWEEN CHICAGO AND NEW YORK.

>> Stephen: IN OTHER WORDS THEY WANT TO MAKE THESE TRADES SO FAST THAT THE ULTIMATE SPEED OF

THE UNIVERSE, THE SPEED OF LIGHT, IS NOT FAST ENOUGH?

>> IT'S NOT FAST ENOUGH.

SO THERE ARE NOW SHIFTS THAT EXECUTE TRADES IN NANO SECONDS.

AND DURING A NANO SECOND THE SPEED OF LIGHT TRAVELS 13 INCHES.

SO THAT -- YOU CAN'T GO ANYWHERE IN THREE NANO SECONDS SO NOW THEY PUT THE COMPUTERS FOR THESE

TRADERS AT THE EXCHANGES.

>> Stephen: SO THEY'RE TRYING TO PUT THE COMPUTERS LITERALLY 13 INCHES FROM THE EXCHANGE?

>> IT'S GOT TO BE AT THE EXCHANGE.

SO THE EXCHANGES NOW CHARGE THESE HIGH SPEED TRADEERS MONEY TO PUT THEIR COMPUTERS THERE.

SO THIS IS A BIG SOURCE OF REVENUE FOR THE EXCHANGES SO THEY ARE TETHERED TO THIS THIS

SOURCE OF REVENUE.

SINCE THEY DON'T WANT TO STOP WHAT HAS BECOME A VERY DANGEROUS THING IN THAT WE CAN LOSE A

TRILLION DOLLARS IN TEN MINUTES-- WHICH IS WHAT HAPPENED ON THE FLASH CRASH.

>> Stephen: THE FLASH CRASH IS SOMETHING THAT HAPPENED IN --

>> 2010.

>> Stephen: OKAY.

2010.

THE MARKET AN ENORMOUS DIVE AND THEN IT RECOVERED AND NO ONE REALLY KNOWS WHAT CAUSED IT, RIGHT?

>> YOU KNOW, THE S.E.C. BLAMED SOME GUY OUT IN KANSAS BUT -- YOU KNOW, I -- WHAT DOES KANSAS

HAVE TO DO WITH ANY OF THIS, RIGHT?

(LAUGHTER)

>> Stephen: I DON'T KNOW!

IT'S YOUR FAULT.

I DON'T KNOW.

>> THEY BLAMED A MUTUAL THAT USED AN ALGORITHM THAT DUMPED FUTURES ON THE EXCHANGE IN

CHICAGO TOO QUICKLY.

BUT THE FACT IS THAT WHAT YOU WERE JUST TALKING ABOUT EARLIER, THE 4% OF THOSE TRADES, MOST OF

THOSE TRADES WERE FAKE, RIGHT?

THEY WERE FAKE.

SO WHAT HAPPENED WITH THE FLASH CRASH IS THE PIPES TO THESE EXCHANGES WERE SO FULL OF FAKE

TRADES THAT THE WHOLE THING SLOWED DOWN.

NO ONE KNEW WHAT WAS GOING ON UNTIL TEN MINUTES PASSED.

>> Stephen: LET'S TAKE ONE STEP BACK HERE.

I ALREADY EXPLAINED TO THE RUBES IN THE AUDIENCE WHAT AN ALGORITHM IS, OKAY?

BUT WHAT IS AN ALGORITHM?

(LAUGHTER) WHAT ARE THESE THINGS THAT ARE DOING THIS THING?

>> AN ALGORITHM IS VERY SIMPLE, REALLY.

JUST A SET OF INSTRUCTIONS THAT TELLS THE COMPUTER WHAT TO DO WITH A PIECE OF INFORMATION.

SO INFORMATION GOES IN, OUTPUT COMES OUT.

A SIMPLE ALGORITHM WOULD BE ONE THAT PLAYS TIC-TAC-TOE.

THE INPUT ARE THE THE MOVES THAT THE HUMAN, THE OUTPUTS ARE THE MOVE OF THE COMPUTER.

>> I KNOW A CHICKEN IN CHINA THOOUN CAN DO THAT, TOO.

(LAUGHTER)

>> SO THE ALGORITHMS ON WALL STREET ARE SIMILAR.

>> THEY'RE LIKE REALLY BIG CHICKENS?

>> REALLY BIG CHICKENS THAT MAKE COMPLICATED TRADES.

BUT THEY DO IT SO QUICKLY THAT YOU CAN LOSE CONTROL OF THE STOCK MARKET IN LITERALLY 30 SECONDS.

>> Stephen: IT SOUNDS LIKE IT'S A GREAT THING FOR BIG INVESTORS OR HUGE INVESTORS OR GARGANTUAN INVESTORS.

WHAT ABOUT THE AVERAGE INVESTOR?

SHOULD WE EVEN BE IN THERE ANYMORE?

CAN WE COMPETE?

CAN WE GET OUR OWN ALGORITHM?

IS THERE AN APP FAR?

(LAUGHTER)

>> WELL, THE PROBLEM IS THE APPS ARE SO EXPENSIVE BECAUSE YOU HAVE TO PUT YOUR COMPUTER AT THE

EXCHANGE AND YOU HAVE TO BUY THESE GIANT DATA FEEDS THAT NORMAL PEOPLE CANNOT RUN THESE.

>> SO IF I'VE GOT MONEY IN THE STOCK MARKET AND I'M JUST AN AVERAGE GUY-- LIKE I AM, AN

AVERAGE JOE-- SHOULD BY PULLING IT OUT AND DOING SOMETHING SAFER WITH IT, LIKE PUTTING IT ON

BLACK AT A ROULETTE WHEEL OR STUFFING IT INTO A SOCK AND THROWING IT INTO THE OCEAN?

(LAUGHTER)

>> THE PROBLEM IS THAT THIS PROBLEM -- IT EXISTS FOR BOTH THE BIGGEST INVESTORS AND THE

SMALLEST INVESTORS BECAUSE THEY'RE ONE IN THE SAME A LOT OF TIMES.

THEY'RE ALL IN MUTUAL FUNDS AND WHEN A MUTUAL FUND WANTS TO MAKE A MOVE, IT'S A VERY BIG MOVE.

IT'S USUALLY LET'S BUY A MILLION SHARES OF I.B.M. OR WHATEVER IT IS AND ALL THESE ALGORITHMS ARE

OUT THERE SNIFFING AROUND FOR THESE BIG ORDERS.

>> Stephen: ARE THEY SELF-AWARE?

IS THIS "THE MATRIX"?

(LAUGHTER) ARE YOU KEANU REEVES?

DO YOU KNOW KUNG FU?

>> I WISH I DID.

>> Stephen: WELL, THANK YOU FOR JOINING ME.

CHRISTOPHER STEINER.

THE BOOK IS "AUTOMATE THIS." WE'LL BE RIGHT BACK.

(CHEERS AND APPLAUSE)

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