High Frequency Trading: The Temporal Prime Directive Has Been Breached

As Trekkies can attest to, breaching the Temporal Prime Directive is never, ever a good thing.  It usually ends very badly.  I hope none of you are wearing a red shirt.

So We No Longer Need NBBO, Right?

This is now at the level of a farce:

On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than the speed-of-light, allowing time travel into the future. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotations and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn’t exist until 190 milliseconds later!

Let’s make sure everyone understands what’s being talked about here – there were trades executed on quotes that hadn’t yet occurred.

Or at least this is what the timestamps represented.

There is absolutely no excuse for this.  It is an absolutely trivial matter to have synchronized time nowdays.  Not by 190 milliseconds, but by a fraction of a millisecond.  In fact, with no effort whatsoever, the colocated server that runs this blog keeps time to within about one millisecond, and I could be more accurate if I cared to spend some money.  That is, I literally am accurate within one millisecond spending zero, using only multiple Internet resources available to everyone (ntpd, to be precise.)  When I ran MCSNet I had a radio clock that sync’d off WWVB and provided time to our network – I picked it up surplus for under $100 and it provided a “chime” timesource accurate to within about a half a millisecond.  Modern GPS receivers can provide similar time service with nothing more than a cable (I have one here at my home in just this application) and likewise are not expensive.

So, what’s going on here?  Well, there are a couple of possibilities. Some of them are truly sinister.  For example, the entire quote system may no longer give quotes to all the people at the same time, and thus the premise that you’re trading against a fair market is a total farce.  Your quotes go in front of or behind others, and others trade in front of or behind you. What’s worse that activity could be happening selectively when it’s bad for you and good for someone else, and there’s no way for you to know!

There are, of course “innocent” explanations that do not involve intentional manipulation, but there’s no way to prove them.  When you no longer can reasonably depend on synchronization at the most-base level – that is, that a timestamp is a timestamp is a timestamp and all are accurate – then you’re not trading or investing any more, you are probably playing at a poker table with a marked deck and confederates sharing their cards with the other players on a selective basis to rip you off.

The SEC won’t stop this crap as is quite clear from the facts over more than a year’s time  so what options do you have left?

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