Hacker Cinema
The Pit
1981 · Film · 97 min
Directed by Lew Lehman
Twelve year-old Jamie Benjamin is a solitary misunderstood boy in his preteens. His classmates pick on him, his neighbors think he's weird and his parents ignore him. But now Jamie has a secret weapon: deep in the woods he has discovered a deep pit full of man-eating creatures he calls Trogs... and it isn't long before he gets an idea for getting revenge and feeding the Trogs in the process!
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2 comments on Hacker News
Speaking as a software developer at one of the exchanges, I thought these comments were accurate and insightful. A lot of people think that colocation is inherently unfair, but they don't realize what a huge improvement this is over the old system of a limited number of floor traders.
One slight correction: I think the movie about floor traders in Chicago is called "Floored". There is another another movie about floor traders in NY called "The Pit".
At the point of IPO the capital for a company has already typically been allocated. The financial markets allow the owners of a company to sell their shares to the public and realize profits on their prior investments. After that markets are about betting whether the price of the company will go up or down and people trade accordingly.
The need to trade instantly is very important for risk mitigation. If unexpected news comes out today that a company is the target of an adverse event like a DOJ lawsuit many market participants will want to react as fast as possible to the news. Say it takes 30 seconds for the price to fall by $10. If you could trade at the 15 second mark you would only lose $5. To an investment firm (non Market Maker or other HFT) this can be crucially important and many firms have automated systems of their own to trade.
A key point of the article that most people miss is that someone has always fulfilled the role that HFTs currently occupy. In the old days floor traders occupied this role as pointed out by the article. Floor trading was a club where you had to buy a seat to be allowed in. Depending on the market the cost of the seat might be hundreds of thousands of dollars. The traders controlled access to the markets and for some markets like Oil the only way to trade was through these floor traders. Now these floor traders took full advantage of this and kept the spreads on the instruments they traded much wider than they are today. In the early 90s you could easily pay $.20 per share to the market maker to get a fill on a liquid stock.
The realization (as pointed out by the article) that computers could do this better and faster is just like any other industry. The people most hurt by this development were the floor traders themselves. There is a movie called The Pit that explores the effect that computerized trading had on floor traders in Chicago. Today if I want to trade MSFT the spread on BATS's BZX exchange was just $0.01. To me, another market participant I consider it to be much better to pay a penny to Getco rather than $.20 to a floor trader.
The colocation business as it has evolved has made market access more equal, not less. Today anyone can pay to colocate a server at NASDAQ, NYSE, BATS, etc... I know longer have to buy a floor seat to be able to trade there. Now there are real market barriers to entry but they are not structural. Just as you can't go build a Google competitor given that you don't have all the historical search traffic data and the infrastructure to compete with them, HFT firms have made significant investments in infrastructure of their own. If you had sufficient capital for technology development you could compete with any other HFT firm.
Yes there are people hurt by HFT, just like anything else when new players with greater efficiency emerge. However the average investor who is not competing with these firms is not harmed. The floor traders were, just like telephone operators before them.