Pinpoint by Greg Milner

Author:Greg Milner
Language: eng
Format: epub, pdf
Publisher: W. W. Norton & Company

Automation is on the horizon for the electrical grid, but it is already in full force in the financial services industry. The system cannot function without accurate timing. This is especially true now that at least half of all trading on the major exchanges is automated. The major exchanges themselves are now inseparable from the computers that do the trading. Meanwhile, high-frequency traders specialize in exploiting the latency inherent in markets, programming their computers to make automatic trades that utilize information before the market as a whole can fully react. For these traders, and the trading algorithms they build, tiny fractions of a second make all the difference.

Since around 2005, data providers have catered to high-frequency traders’ insatiable appetite for speed by constructing ever-faster communications lines between the cities where most of the world’s heaviest trading volume occurs. That war is nearly over. There is nary a stray microsecond left to shave off these travel times. The logical next step has been for high-frequency traders to decrease the physical distance between their computers and the exchange computers as much as possible. For a fee, the exchanges allow traders to “co-locate,” housing their trading computers in the same facilities as the computers that process trades, with all the various traders’ computers connected to the exchange computers by identical lengths of cable, so that even the position in the room cannot impart an unfair advantage. “A decade ago, a tenth of a second was an acceptable time stamp resolution,” Humphreys said in his congressional testimony. “High-frequency traders now demand nanoseconds.”

The potential problem with these arrangements is that the exchange clocks, like so many extremely accurate clocks in this world, receive their time signal from GPS. Humphreys, who has met with exchange officials and observed their setup, believes they have the necessary safeguards in place to make a spoofing attack on their clocks very unlikely. He does not have nearly the same level of confidence for the co-located high-frequency traders.

The exchanges give their co-locator clients two options. They can “slave” their trading computers to a time source provided by the exchange: usually an atomic clock, linked with its minions via precision time protocol, a very accurate and dependable way to synchronize internal computer networks. The use of the atomic clock—which runs wholly independent of GPS time—along with the internal safeguards the exchanges employ to detect GPS spoofing attacks, makes this the most secure choice.

Many high-frequency traders choose option two. They feed their computers the raw GPS feed coming from the antenna on the building’s roof. After all, the exchange’s atomic computer may offer sub-microsecond accuracy, but that necessarily means that time in its universe lines up with GPS time. Maybe one millisecond after midnight, for this clock, occurs one microsecond after one millisecond after midnight, as defined by GPS. If your trading algorithm is programmed to do something at that moment in time, it may lag behind other traders who use GPS time. The problem, Humphreys maintains, is that the traders’ computers do not have the anti-spoofing protection the exchange applies to its own computers.

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