Making Trades in the Past

From Jerry Adler at Wired:

The 2012 New York Battle of the Quants, a two-day conference of algorithmic asset traders, took place in New York City at the end of March, just a few days after a group of researchers admitted they had made a mistake in an experiment that purported to overturn modern physics. The scientists had claimed to observe subatomic particles called neutrinos traveling faster than the speed of light. But they were wrong; about six months later, they retracted their findings. And while “special relativity upheld” is the world’s most predictable headline, the news that neutrinos actually obey the laws of physics as currently understood marked the end of a brief and tantalizing dream for quants—the physicists, engineers, and mathematicians-turned-financiers who generate as much as 55 percent of all US stock trading. In the pursuit of market-beating returns, sending a signal at faster than light speed could provide the ultimate edge: a way to make trades in the past, the financial equivalent of betting on a horse race after it has been run…

By some estimates, 90 percent of quotes on the major exchanges are canceled before execution. Many of them were never meant to be executed; they are there to test the market, to confuse or subvert competing algorithms, or to slow trading in a stock by clogging the system—a practice known as quote stuffing. It may even be a different stock, but one whose trades are handled on the same server. On the Internet, this is called a denial-of-service attack, and it’s a crime. Among quants, it’s considered at most bad manners.

Previously.

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