Unifying the very small and the very large
Ever wonder how high-speed trading gets people rich? It's a very simple algorithm, really, and can be beat by an ingeniously simple solution:
1) Watch for a 'slow' buy order coming from a real person
2) Issue the same order at another exchange before the first trade is executed
3) Now you've driven the price up a few cents, so wait a few milliseconds until the 'slow' trade is filled, and then issue a sell order.
The advantage lies in the network fibres: The algorithm assumes that their high-speed fibre will get the order to another exchange before your order gets there on the 'slow' cables.
Now the solution: send the same order with a slight time delay to all the exchanges, so that they arrive at the same time. This prevents high-speed traders using that particular algorithm from gaming the market. That's some deep-level packet and hardware knowledge needed to beat the market.
Which raises an interesting insight that applies to not just stock markets but also to other aspects of daily life, as ubiquitous computing brings lower-level interfaces into consumer gadgets: Technology changes our habits and processes at a fundamental level. To understand this change, we need to understand how these fundamental, low-level hardware concepts create implications on the higher level of our society.
Translated into English: The 1% understand that the nitty gritty details which network geeks deal with can line their pockets with gold, because they assume that no other sane person would care to look at both the nitty gritty details and the big picture.
Is the U.S. stock market rigged?
Steve Kroft reports on a new book from Michael Lewis that reveals how some high-speed traders work the stock market to their advantage