Millisecond Recipe for Disaster

In 1987, the stock market crashed in part because speculators were using “portfolio insurance,” automated programs that were supposed to eliminate risk. Things unraveled quickly leading to enormous losses.

Now, modern technology allows trading to work at warp speed — millisecond trading.

Gangahar, Anuj. 2007. “‘Millisecond’ Trading Arrives.” Financial Times (19 March): p. 25.

“Some of the largest participants in US capital markets are to start using a new system that dramatically cuts the time it takes to trade and communicate with each other, as they respond to the greater demand for speed from hedge funds and other traders. It will reduce transaction times to just 1 millisecond from about 10 milliseconds at present, in the New York metropolitan area. Hedge funds and other traders who employ complex strategies, are putting ever greater emphasis on the speed at which they do business, as competition to eke out the best returns intensifies.”
“The system, known as Radianz Ultra Access, offered by BT Radianz, part of BT Global Services, offers an ultra high-speed connection between exchanges and brokers in the region. Institutions that have signed up to use the system already include the NYSE Group, Nasdaq, Boston Options Exchange, BATS electronic communications network, and the International Securities Exchange, among others.”

“The uptake of the new system comes just weeks after the introduction of Regulation National Market System, a controversial set of rules aimed at levelling the competitive field in the US equity market, meaning trades must be routed to the exchange that offers the best price.”

“During the recent market sell-off, a week before the introduction of Reg NMS, a spike in trading volumes caused some systems and servers to go down, leading to widespread concerns about technology bottlenecks disrupting the financial system.”

“BT Radianz developed the new system in response to the growing use of algorithmic and black-box trading strategies by broker-dealers, asset managers, prime brokers and hedge funds. Tom Price, senior analyst in the securities and capital markets practice at the Tower Group consultancy, said: “Speed is a competitive differentiator for market participants using advanced trading strategies. The ability to consume massive amounts of data, translate it into opportunity, and get orders to the appropriate execution venue ahead of the competition, is key to success.”

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